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The Evolution Of The Role Of Government In The Economic Development Of Mexico

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The Evolution Of The Role Of Government In The Economic Development Of Mexico

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Content This dissertation has been
microfilmed exactly as received 68— 12 ,0 2 9
DE FLORES, Louis Joseph, 1918-
THE EVOLUTION OF THE ROLE OF GOVERNMENT
IN THE ECONOMIC DEVELOPMENT OF MEXICO.
U n iversity of Southern C alifornia, Ph.D., 1968
E conom ics, finance
University Microfilms, Inc., Ann Arbor, Michigan
THE EVOLUTION OF THE ROLE OF GOVERNMENT
IN THE ECONOMIC DEVELOPMENT
OF MEXICO
by
Louis Joseph De Flores
A Dissertation Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(Economics)
January 1968
UNIVERSITY O F S O U T H E R N CALIFORNIA
THE GRADUATE SCHOOL
UNIVERSITY PARK
LOS ANGELES. CALIFORNIA 9 0 0 0 7
This dissertation, written by
............ J-os-eph.--D-e.-F-lor.es........
under the direction of /fin... Dissertation C o m
mittee, and a p p ro ved by all its members, has
been presented to and accepted by the Graduate
School, in partial fulfillment of requirements
for the degree of
Date January...l.Q.t . . . . 1 9 . 6 . 8......
D 1SS E RTA'I ION CO MM ITTE E
D O C T O R O F P H I L O S O P H Y
Dean
Cnairman
TABLE OF CONTENTS
Chapter Page
I. INTRODUCTION 1
The Problem and Its Importance
Objectives and Scope of the Study
Review of the Literature
Methods of Research and Analysis
Library Investigations
Reports of Investigations by
Institutions and Commissions
Interviews
Definitions of Special Terms
and Concepts
Short Preview of the Remainder
of the Dissertation
II. A GENERAL SURVEY OF THEORIES
The General Classical Theory
of Economic Development
Introduction
Leading Dimensions of the Classical
Theory of Development
Karl Marx and Economic Development
Joseph A. Schumpeter and Unstable
Growth
Schumpeter’s Propositions
The Harrod Model of Growth:
An Introduction
Lord Keynes and Growth
Elements of the Harrod Model
Contemporary Criticism of
Harrod's Model
OF ECONOMIC DEVELOPMENT 28
ii
Chapter Page
III.
IV.
Underdevelopment: Social Aspects
THE PHYSICAL AND HUMAN GEOGRAPHY . .
Physical Geography
Physical Features
Climate of Mexico
The Land Characteristics
Demography of Mexico
The Population Growth of Mexico
Composition of Population
Socio-Economic Groups and Regions
The Metropolis
The Core Area
The North
The West
The South
Economic Resource Base
The Agricultural Areas
The Drylands: Their Agriculture
and Minerals
The Scarcity of Resources
The Economic Resource Base
A BRIEF HISTORY OF MEXICO AND THE
EARLY EVOLUTION OF THE GOVERNMENT . .
The Invasion
The Colonial Government
and Haciendados
The Colonial Administration
The Hacienda System
The Church in the Colonial Period
Mercantilism as a Background
to Development
The Mexican Independance
?4
109
ill
Chapter Page
Father Miguel Hidalgo
Father Jose Maria Morelos:
Architect of Modern Government
The Mexican Independence
The Interlude: The Federalists
Versus the Centralists
The Centralist Party
The Federalist Party
Summary and Conclusions
V. THE EVOLUTION OF MODERN GOVERNMENT:
THE JUAREZ AND DIAZ ADMINISTRATIONS . . . .150
Early Reform and the Juarez
Government
The Ley Juarez--Its Social
Significance
Ley Lerdo--Its Economic
Significance
The Major Reform Movement
Benito Juarez and the Reform
Government
Porflrio Diaz, 1876 - 1910
Mexico Wanted Political
Stability
Foreign Investment and
Growth
On the Laissez-Faire Climate
in the Economy
The Cientificos as Public
Entrepreneurs
United States: The Largest
Investor
Evolution of Economic Growth
Under Diaz
The End of a Dictator
iv
Chapter Page
Summary: Evolution of the Role
of Government to 1910
Father Miguel Hidalgo
Father Morelos--Blueprint for
Economic Reform
The Constitution of 1857
The Economic Role of Government
Under Juarez and Diaz
VI. THE DEVELOPMENT OF THE POLITICAL AND
ECONOMIC ROLE OF GOVERNMENT, 1910/19^0 . .
Overview and Chronology
The Revolution of 1910
Social Change
The Spirit of the Revolution
The Chaos of 1910-1917
Early Revolutionary Leaders
Carranza and the Constitution
of 1917
Carranza's Legislative, Political,
and Economic Activity
The Calles Administration: Political
Unity and Economic Reform
Overview of 1920-193^
The Calles Administration
Economic Conditions, 1920-193^
The Cardenas Administration
The Agrarian Reform
Political and Economic
Participation
Economic Conditions and
Policies under Cardenas
Public Expenditures and
Monetary Problems
. 180
v
Chapter Page
VII.
VIII.
Summary and Conclusions
The Political and Economic
Revolution of 1910-1920
The Role of Government in
Mexico's Economic Development
from 1920 to World War II
MODERN MEXICAN GOVERNMENT AND
ECONOMIC DEVELOPMENT, 19^0/1962 .........
Introduction: Purpose and
Organization
The Quest for Industrialization
Opposition to Industrialization
Pro-Industrial Advocates and
Mexico's Rapid Growth
The Central Guidance Cluster as an
Instrument for Development Since 19^0
The Big Four in Government
Inflation, 19^0-1960
Deficit Spending and Inflation
The Political Framework
for Government" Decisions
Expansion of the Infrastructure and
Dimensions of Development
Public Enterprises
Social Overhead Capital
The National Railway System
Hydraulic Programs
Tourism and Economic Growth
Summary and Conclusions
FISCAL AND MONETARY DIMENSIONS OF
RECENT ECONOMIC GROWTH IN MEXICO .........
Introduction
vi
281
330
Chapter Page
Characteristics and Trends
in Government Taxation
Characteristics and Trends in Government
Expenditures
Budget Policy and Administration
The Budget-making Process
Problems of Budget Analysis
Significance of Projected and
actual Budget at Current and
1950 Pesos
Monetary and Fiscal Policies
Summary and Conclusions
IX. SUMMARY AND CONCLUSIONS ...................
Summary
Conclusions
BIBLIOGRAPHY ..........................................
375
39^
vll
LIST OP TABLES
Table Page
1. Total Area of Land Distributed Under
Agrarian Program and Average Size of
Allotment 1915-1920 .............................. 215
2. Value of Oil Exports and Related
Data, 1927 ........................................ 220
3- Estimated National Income of
Mexico, 1929-193^ 237
4. Total Area of Land Distribution Under
the Agrarian Program and Average Size
of Allotment 1921-19^0..........................245
5. Gross National Product ......................... 250
6. Growth of the Highway System.....................319
7. Tourist Revenue as a Per Cent of Total
Foreign Exchange Revenues . . . . ................325
8. Tourism and Broader Trade .........................327
9. Effective Federal Tax Revenues...................33^
10. The Export Value of Cotton . . . * ..............337
11. The Fiscal Peso in 1 9 ^ 2 ...........................342
12. Average Per Cent of Federal Budgetary
Expenditure by Type of Emphasis and
Presidential T e r m .................................. 344
13* Classification of Mexican Federal Government
Budgetary Expenditures by Type of Emphasis . . 345
14. Distribution of National Expenditures
1900 to 1 9 3 4 ........................................ 3^8
vlii
Table Page
15. Participating of Expenditures by
Government Agencies and Public
Enterprises in Mexico in Selected
Periods, 1939-1960 .............................. 351
16. Average Per Cent of Military Expenditures
to Actual Total Budget .......................... 35^
17. Projected and Actual Budget 193^-1963 .......... 36^+,
ix
CHAPTER I
INTRODUCTION
The Mexico of yesterday, that is, of about three
decades ago, was a nation with a vast number of villages
scattered throughout its deserts, tropical zones, and
mountain plateaus. At that time, some of the Isolated
regions had experienced not even the most casual brush
with economic development. The few known larger cities
were the only centers of trade— with Mexico City account
ing for most of the Industry and finance.
The last three decades, however, have been marked
with an Impressive rate of economic growth. The late
1950's presented a milestone in one stage of economic
development. During those years capital formation
reached a new level of attainment. While Mexico is not
self-sufficient in basic foods, for example, the agri
cultural sector has generally realized some major ex
pectations, and has managed to keep abreast of the rate
of population growth.
2
It Is also notable that the central government
has played a very Important role In this process. The
role of public finance has been significant not only
in rural areas where the public sector allocated ex
penditures for irrigation, soil improvement, credit,
and rural electrification— but also In the growing
urban centers which have benefited from heavy govern
ment finance and political aid.
Since the 1930's, several urban centers have
emerged as evidence of Mexico’s regional economic growth
in either agriculture, industry, or trade. The most
important of these new centers are Guadalajara, Monterey,
and Puebla. Mexico City, however, towers as the largest
metropolis in Mexico. It is the heart of industry,
commerce, finance, and is the cultural capital of the
nation. Mexico City is also the economic and political
center where the central government has a strong role in
determining the economic policies and destiny of the
nation.
Peculiar to economies in the upward surge of
development, the rise of Mexico's real income during
the last three decades has been more pronounced in cer
tain areas. For instance, the per capita income of the
principal urban centers has reached $630. The national
3
average is somewhat less impressive— with an amount
about half the above figure while the rural areas hard
ly exceed $130.
Mexico's "particular brand of growth" and internal
geographical differences in development will undoubtedly
spur the desire for a more balanced and stable rate of
growth. For this reason, and possibly others to be dis
cussed in this paper, it is likely that the public sec
tor and public finance will take on a more ambitious
role in the future development of Mexico.
I. THE PROBLEM AND ITS IMPORTANCE
The study of the increasing economic role of the
public sector in the Mexican economy suggests underlying
changes in the attitude and institutions of that country.
Thus, in one respect, the Mexican economy is a study in
social dynamics— dynamics in social institutions as well
as in economic change. Consequently, the subject matter
presented in this chapter is concerned with developing
the theme of this dissertation, namely, the increasing
role of government policy legislation, and necessarily,
the application of public finance and fiscal policy to
the development process.
4
Most rising new economies lack social develop
ment (a level of community maturity* an awareness of
social needs, and a "capacity" for self-government)
together with a quality of creativeness, and a kind
of "economizing" spirit, all of which contribute to a
climate essential to economic growth--the type of growth
typical of the more advanced industrial nations.
During the early stages of growth, new nations
may find the general absence of these social and moral
factors an obstacle to development. These obstacles
may retard the necessary climate, such as attitudes
toward working, saving, investing, capital maintenance,
and planning. New economies also face the problem of
determining the overall social and economic approach to
development, namely, the extent that public credit or
private capital will share in the development process
and whether it is to be in the form of domestic or
foreign private capital or both.
Another vital consideration is the extent of
central direction in resource allocation. Not only on
matters of social overhead capital, but also in regard
to the allocation of resources which the private sector
will employ in domestic development, the question arises
as to whether, and to what extent, the government
should participate in this process. In other words,
how strong should the role of the public sector be in
planning and resource allocation in a mixed economy?
At the same time, as some of the economic literature
contends (see Chapter II), the growth as attained by
the advanced industrial nations may not be the specific
desirable criterion for the growth of underdeveloped
countries.
It is important to note that Mexico has stated
in concrete terms its desire for economic development.
It has also shown the essential social qualities in the
last three decades for the attainment of those goals.
The Revolution of 1910 and the Constitution of 1917 set
forth the principal aims to growth as well as the dynaml
role the central government and public finance are to
exert in rising economies. A significant factor contrib
utlng to economic development thus far has been the po
litical stability Mexico has attained by its present
political system— a single-party democracy. This is a
marked departure from the social upheavals and violence
which characterized the nineteenth century efforts to
social change. (See Chapters IV and V.)
Thus, the present influence of Mexico's public
sector is evident to economic observers. As a catalyst
to growth, the predominance of central government stems
from broader changes in Mexico's social spectrum, as
stated above. Also, social changes are said to set the
necessary pace for reforms leading to economic growth.
It is noteworthy, however, that some societies, rooted
in mores of long standing, find It difficult if not
frightening to cope with change easily. This is not the
case of Mexico. The Constitution of 1917» the rising
politicos, and the growing entrepreneurial middle class
have demonstrated a bending quality necessary to cope
with Internal as well as external social tides. And to
be sure, allowing for certain institutional perversities,
later discussed in this dissertation, the Mexican insti
tutions of today differ In some ways from those of forty
years ago, and are strikingly different from those of
pre-revolutionary days.
Another reason for the importance of the growing
Influence of the public sector lies in the difference
between Mexico's current standard of living and that of
three or four decades ago. In the past, Mexico was a
typical example of general poverty and stagnation. The
Mexican economy revealed the circularities of low In
come and productivity due to the narrowness of local
7
markets, the lack of sufficient social overhead capital,
lack of savings, monopolistic advantages possessed by
foreign enterprises, and from other institutional hin
drances to economic growth.
Today, Mexico is a study in dynamics. This
dynamic aspect receives its primary generating force
from the central government. Therefore, the present
study attempts to analyze the evolution of government
as a series of revolutionary adjustments that has grad
ually worked itself into the position of key importance
in the economic development of Mexico, But the unique
role of central power today is better understood by a
review of the political process of the country as well.
Thus, since the 1930's, the Mexican government has laid
the foundations for agrarian reforms, labor legislation,
expropriation of foreign-owned railroads and oil prop
erties, the operation of government-owned enterprises,
and the protection of growing domestic industries. But
of considerable Interest to this dissertation are the
public Investments in social overhead capital, tax ex
emptions, tariff policies, direct controls, government
policy on foreign investments, and the development of
public credit— all of which are factors to the economic
development of the nation.
8
In spite of Mexico*s impressive rate of growth
during the last three decades, many problems remain.
This study recognizes the significance of Mexico's struc
tural growth to the future of the economy. This is not
unusual to a country emerging from underdevelopment.
The benefits of Mexico's current economic efforts have
not been equally spread either among income groups or
among regions. For this reason, this dissertation is
also concerned with evaluating the influence that the
public sector may exert on the future rate of growth.
There are other facets of importance to this
dissertation. Among them is the "unique" role that the
executive branch of government plays in the Mexican
economy. While the country embraces democratic prin
ciples, the presidency reveals a marked difference to
such other economies as the United States and Canada.
The presidency wields a power many a dictator might
envy. Yet the President of Mexico can nearly always
point to a constitutional provision that justifies some
public act he wishes to perform. In practice, the
legislature Is a passive body which hardly ever fails
to carry out the wishes of the President. Through his
Minister of Finance, the President exercises a powerful
9
weapon with his budget-making prerogatives. The Minister
of Finance exerts an extraordinary measure of direct con
trol over current budgetary expenditures of government
agencies, as well as capital expenditures throughout the
executive branch. Moreover, by means of his control
over the policies of the nation's central bank and its
principal development banks, the Finance Minister is able
to exert ubiquitous influence upon the whole economic
development process.
It should be noted that the new role of govern
ment in Mexico holds a particular meaning to the new
Industrialists— a group which emerged during World War II.
This group demanded a realistic and cooperative spirit
with government on expenditures and public policies de
signed to promote economic growth. For the new Indus
trialists, the "realistic and cooperative spirit" means
a public budget which favors the new group in particular,
and, as the case may be, such demands may not necessar
ily coordinate with the general public interest. Yet,
and curiously it seems, they have been staunch advocates
of strong private enterprise. They contend that govern
ment should not compete. In other words, the public
sector should not engage in private enterprise.
10
But by way of contrast, not all of the business
factions have been in agreement with a big government
and heavy public finance. The older industrialists and
private banking Interests, who have adequate Internal
credit resources, would prefer a more laissez-faire
atmosphere.
In view of its background, it is not difficult,
therefore, to understand the "unique" role of the Mexican
government, and the extent of its Influence upon the
nation's economy. Moreover, it has been widely observed
that in the surge towards economic growth by underde
veloped nations, social overhead capital, as a pre
requisite to stable development, has become In recent
times the full responsibility of central government.
As stated above, Mexico illustrates this point. But,
of course, this is a measure of departure from the de
velopment process the matured economies experienced one
or two centuries ago.
Finally, in view of the factors noted in the
preceding discussion, the public sector is unequivocally
committed to the objectives of economic growth. The
central government, on the other hand, does not plan
industrialization. But government finance, as previous
ly mentioned, makes possible many other development func
11
tions, such as communications, soil improvement, irri
gation systems, oil, electrification, and the much needed
public credit. In addition to social overhead capital,
the public sector operates several important public en
terprises .
II. OBJECTIVES AND SCOPE OF THE STUDY
This study focuses upon the Mexican government's
main stream of public expenditures, sources of revenue,
and the development of public credit. The main core of
research, therefore, is within the confines of the role
that government exerts on the economy through legisla
tion, public policy, the budget, and public credit as
an instrument to economic growth. The significance of
the public sector, however, does not lie solely in the
political and economic Influence of government. As in
the case of Mexico, the public sector not only embraces
public enterprises, but also government agencies. On
the other hand, public regulations affect industry and
commerce. Its Importance does not stem from budgetary
considerations, but rather from the effects its "rules
of the game" exert upon the Internal growth of the econ
omy. The quest of this dissertation, therefore, includes
a brief discussion into the evolution of contemporary
12
laws affecting the relationship between government and
the private sector.
The importance of public finance to economic
growth has been one of varying degree— and not without
impediments. For example, the characteristics of Mexico's
political history until recent times are mixed and often
difficult to define because of the sporadic changes in
political action and social upheavals. Today, while
sometimes at odds with particular factions of the bus
iness community, the Mexican government has formed a
sort of partnership with the private sector in which
each plays a role.
Nonetheless, this study finds the relationship
between the public and private sectors difficult to
discern. Some of the conflicts that arise between the
two sectors over the question of government policy go
on sub rosa. Writers of the political arena say that
only a part of the process is visible to the outsider.
Besides, dealings by government in domestic and foreign
matters according to established policy are not always
consistent. The President is known to Indulge in par
ticularism. However, for the purpose of this dlsserta-
tlon, stress is placed on the evolvement of broader
government policies as described by the federal budget
and public policy rather than emphasis on Institutional
irregularities— with one exception. Mexico's political
and economic climate, together with the particular and
unique way the government functions today has deep roots
in the institutions of the past. Therefore, the Presi
dent's particularism as well as uniform treatment in
political theory and other social institutions that
form the traditions of Mexico. Some of this background
is developed in Chapters IV and V. For example, Mexican
history reveals that political realities have not always
corresponded to legal forms. The realities behind the
forms of Mexican constitution have generally been the
rule of individual leaders. To harmonize the spirit of
government with the letter of the constitution has been
a process not always realized in quite that way. One
of the major reasons lies in the Spanish heritage.
The Spanish in the colonial period had shown a
strong sense of personal individuality and an unwilling
ness to cooperate on a basis of equality. The institu
tional loyalties of England and the United States, which
provided a basis for the growth of constitutional govern
ment, have been insignificant in Spanish history. In
Spanish society, personal ties, rather than attachments
I**-
to doctrines or institutions, have been the chief in
tegrating force. This spirit has carried over into
Mexican politics and decision-making, where politicians
tend to group themselves around individual leaders, in
stead of uniting on the grounds of common attraction to
a body of doctrine.
More specifically, however, the dissertation
holds of prime Interest the study of the role of govern
ment in public finance and fiscal policy with reference
to: (1) taxation, and the sources of revenue— Including
the types and the reason for tax exemption; (2) the
nature and allocation of expenditures; (3) government-
owned enterprises; (*0 sources and extent of public
credit; and (5) the effects that the main stream of
government fiscal actions have had upon the private
sector in the form of attitudes, visible incentives, and
ultimate economic growth.
This study is cognizant of the contemporary mean
ing of national "plans" in Mexico. Some countries reveal
at least partial evidence of national plans which their
governments have established in their national economic
targets. The Mexican government has been conspicuously
silent in this regard. Discussions on the problem of
national planning have begun to appear only recently in
v
15
the field, of publication. What have been labeled as
"national plans" in Mexico are really no more than
statements of "selective priorities."
III. REVIEW OF THE LITERATURE
The literature which is of value to this study
is scarce. There are reasons for this. In the early
stages of economic development, a country's government
is not sufficiently affluent to allocate budget funds
for the purpose of recording the multitude of data of
government transactions. Government revenues are typi
cally too limited to warrant expenditures of that type.
This can be said to be the case of Mexico prior to 1910.
In recent years, more data are available from the vari
ous branches of government. Some of these data, however,
appear to be jealously held.
There is an important source of publications in
Mexico under the name of Fondo de Cultura Economica
(Center of Economic Culture). The releases from this
center are widely used by Mexican writers in the fields
of social disciplines. One of the Fondo's important
works is Mexico, 50 Anos de Revolucloni La Economica.
(I960), (Mexico, 50 Years of Revolution: Economic).
16
There are many Mexican writers in the field, of
national economy. Ifgenia M. de Navarrete is well known
for La Distrlbuclon del Ingreso y el Desarrollo Economlco
de Mexico. (The Distribution of Income and the Economic
Development of Mexico). There are many others. Among
them: Diego Lopez Rosado's Problemas Economlcos de
Mexico (Economic Problems of Mexico); and Paul Lamartine
Yates' El Dessarrollo Regional de Mexico (Regional De
velopment of Mexico). A recent publication by Dwight
S . Brothers and Leopoldo Solis (Mexican Financial De
velopment) presents an extensive and theoretical treat
ment of the Mexican financial process. Roberto Lopez
and Anlceto Figueroa have published Teorla General de
las Flnanzas Publlcas jr el Caso de Mexico (The General
Theory of Public Finance and the Case of Mexico) .
The areas of social and political theory per
tinent to this study Include several publications:
Joseph Maier and Richard Weatherhead, Editor, Political
Change in Latin America; L. Vincent Padhett, The Mexican
Political System: John J. Johnson, Political Change in
Latin America: The Emergence of the Middle Sector;
Robert E. Scott, Mexican Government in Transition;
Alfred Kuhn, The Study of Society, A Unified Approach.
17
A number of American economists have written
material directly and indirectly related to this study.
Among them: Raymond Vernon, The Dilemma of Mexico1s
Development, and Public Policy and Private Enterprise;
Robert E. Scott, Mexican Government in Transitlon;
William P. Tucker, The Mexican Government Today; Sanford
A, Mosk, Industrial Revolution in Mexico; and historical
analysis by Howard F. Cline in his Mexico. Revolution
to Evolution 1940-1960. Other sources include: Werner
Baer and Isaac Kerstenetzky, Inflation and Growth in
Latin America; Antonin Basch, Financing Economic Develop
ment ; and Ursula Hicks, Development Finance: Planning
and Control.
In addition to the many books written by American
economists and historians (dealing oh the whole with the
economic conditions of Mexico), there are several Ameri
can journals from Institutions of research and universi
ties that explore the various facets of the Latin Ameri
can economy, for example, Economic Development and Cultur
al Change; and the Inter-American Economic Affairs. Among
the more widely known learned journals, the Journal of
Political Economy has published articles on development
and problems of capital formation in Mexico. These pub
lications are excellent secondary source material.
18
The International Monetary Fund, The International
Bank for Reconstruction and Development, and the United
Nations publications on the economics of Latin America
and Mexico afford some material references,
IV. METHODS OF RESEARCH AND ANALYSIS
Research for this study employs the following
procedures: (1) library Investigations; (2) reports of
investigations by institutions; and (3) Mexican govern
ment reports.
Library Investigations
A portion of this research is based on secondary
sources. A partial list of books and publications have
been mentioned In Part II above. Many libraries carry
the publications pertinent to this research. The review
of the literature consists not only of subjects of an
economic nature, but also a variety of materials from
other social disciplines essential to the concept of
economic development.
The Los Angeles Public Library. This leading
public library offers an Impressive amount of material
essential to this paper. A generous selection is found
on recent books, journals, and publications on Mexico's
social and economic conditions.
19
University of Southern California Library. The
Edward C. Doheny, Jr., Memorial Library offers much tech
nical source material on the theory of economic develop
ment of underdeveloped areas. This reference is essen
tial as a tool for analytical discussions of the Mexican
economy in its various stages of development.
The International Library housed in the Doheny
Library offers publications on social and economic
studies from all parts of the world. These references
include generous amounts of data from the United Nations,
the International Bank for Reconstruction and Develop
ment, the International Monetary Fund, and articles from
many countries on social and economic studies.
The Library of the University of California at
Los Angeles. This state library houses a great variety
of publications on economic development including many
books and research on the economics of Latin America.
Reports of Investigations by Institutions and Commissions.
Research on economic development has been under
taken by several institutions and universities. Among
these is the Center for International Affairs at Harvard
University which conducts studies on the relationship
of government to private enterprise in economic develop
ment. Another valuable source is the Massachusetts
20
Institute of Technology, which undertakes research on
the problems of economic development. The University
of Texas Research Institute is also noted for its studies
on social and economic problems in Latin America,
Mexican Government Publications. Reports by the
Mexican government are of paramount importance. But
the amount of statistical data needed for effective
evaluation is not as generous as one might anticipate.
Moreover, at this stage of social development in Mexico,
a veil of sporadic secrecy on reporting all of govern
ment undertakings is sensed by some American economists
who are interested in Mexico.
The Unlverslded Nacional Autonoma de Mexico. This
is the national university of Mexico. Its department
of economics has been developing an impressive list of
publications on the economic problems of the country.
Some of these articles stress the problems of public
finance, as well as what they consider "the growing
foreign monopolies" in Mexico.
The Banco Nacional de Mexico. The research and
statistical department of this central bank of Mexico
has published numerous tracts on the state of the Mexican
economy. These reports are well organized; and in spite
of their limited treatment they reveal good Insight Into
21
Mexico's general Investment undertakings. In this same
vein, the Mercado de Valores (Market Values), a publica
tion of Nacional Financiera, South America, reports data
on Mexico's internal development and trade.
Interviews
Interviews, especially with Mexican economists
and government officials, has been another Important
source of Information for this dissertation.
V. DEFINITIONS OF SPECIAL TERMS
AND CONCEPTS
The majority of terms and concepts peculiar to
discussions of economic development are explained in
Chapter II. There are, however, terms denoting stages
of growth that have led to misunderstanding of social
and economic conditions due to a lack of agreement. For
Instance, the term "backwardness" does not seem to com
municate the same connotation to all users of the word.
Also, the less fortunate nations resent the expression
and prefer to use "less developed". . . an expression
which could still leave the reader somewhat mystified.
Harvey Leibenstein sets forth four major charac
teristics denoting "backwardness." Each of these four
characteristics can be expanded into greater social,
22
political, economic, and technological details. Paul
Samuelson describes "backwardness" as a situation where
the real per capita income is low as compared to the
present day standards of such nations as Canada, the
United States, Scandinavia, et cetera.
Walter Rostow popularized the expression "take
off." This means that in the push from low underdevelop
ment, the old blocks and resistance to steady growth are
finally overcome, and further growth becomes self-sus
taining.
"Disguised unemployment" is often found in the
literature of economic development. A general definition
states that disguised unemployment is the case where a
subtraction of a portion of the labor force will not
necessarily reduce total output.
"Mexlcanization" is an expression used in lieu
of the term "nationalization," such as nationalizing
Mexico's basic resources or Industries characterized by
a public interest.
The term "patron" implies a boss of a ranch or
business with a paternalistic attitude towards his em
ployees .
23
VI. SHORT PREVIEW OF THE REMAINDER
OF THE DISSERTATION
The remainder of the dissertation will be organ
ized as follows: Chapter II presents a general survey
of the main theories of economic development. It draws
historic parallels in the Mexican case, relating or em
phasizing the particular subject at hand with the past
or current development in Mexico. The latter part of
the chapter calls attention to the significance of social
change and the social and cultural aspects as these re
late to the problems of economic growth.
Chapter III presents the human and physical geog
raphy of Mexico. The topography is treated both as an
obstacle and a factor in resource development. The
demographic presentation is significant to the problem
of growth of real income per capita. Finally, the
chapter studies the division of Mexico by regions in
terms of growth and the role each plays in the develop
ing process of the nation.
Chapter IV covers a brief history of Mexico and
the early economic evolution of government. This chap
ter describes the Spanish social and psychological cli
mate, and those traditions, peculiar of the Spanish,
which served as background to present-day thinking in
Mexico— particularly how that background has influenced
the economic role of present-day government. The social
and economic conditions of the colonial period, the sys
tem of colonial rule, and the Spanish mercantilist poli
cies had a telling effect upon the molding of govern
mental ideology— or for that matter, upon the absence
of a uniform body of doctrines in practice. This chap
ter also presents the role that the church and the mili
tary played during the colonial period. Their signifi
cance extend beyond that era. These institutions were
in part instrumental in the revolt and bloody revolutions
out of which emerged a new set of national values with
central government as the dominant force.
In Chapter V, the early evolution of Mexican
government in the latter nineteenth century is described.
The Juarez and Diaz administrations played a paramount
role in shaping the economic and political events that
led to the Revolution of 1910 and the social and economic
reforms that followed.
Chapter VI sets forth the political and economic
climate as implemented by the new (reform) revolutionary
governments. The core of the chapter relates to two dis
tinct periods of social and economic development. The
first includes the administrations of Carranza, Obregon,
and Calles. Social and economic reforms were initiated
under the goals of the Constitution of 1917» with govern
ment implementing agricultural and monetary reforms, and
the early development of the nations infrastructure.
The second period covers the Cardenas administration.
This was the era of important development of the role
of government. The single-party system was expanded
and strengthened. Land distribution was extended to a
level never attained by any subsequent administration.
Some of the nation's basic resources were nationalized—
such as some of the agricultural lands, mining, and the
oil industry. Social and economic expenditures were ex
panded together with new public credit institutions,
thus setting the stage for the rapid Industrial expan
sion which took place after 19^0.
Chapter VII pursues in more concrete terms an
exposition of the Mexican-mixed economy with government
as the participator as well as the promoter. The sue-
/
cessors of President Cardenas (the Avila Camacho, Miguel
Aleman, and Ruiz Cortinez administrations) made a radi
cal shift from the previous goals of agrarian reform to
a heavy emphasis on Industrialization. Government bud
get and public enterprises played a leading role in de
veloping the nation's infrastructure. In part, however,
26
economic growth was promoted by loans to public enter
prises (and many private producers and agricultural en-
terpreneurs) from the major public development bank.
The latter, in turn, obtained the necessary capital funds
by borrowing heavily from abroad. On the other hand,
direct and indirect foreign capital Investments in the
private sector were also instrumental in Mexico's economic
development.
The chapter reviews the economic policies of re
cent administrations with reference to problems of public
credit and expenditures on infrastructure. Inflations
as a factor in economic growth and its effects on the
economy are also evaluated. Finally, the political pro
cess in government and decision-making apparatus as cen
tered in the Office of the President are discussed as an
important feature in the economic role of government.
Chapter VIII reviews the characteristics of the
tax administrations of the recent past, the problems of
meeting the necessary revenues, and recent tax reform as
a measure for financing current public expenditures on
infrastructure and social and administrative cost. The
core of the chapter centers on budget problems and poli
cies designed for more effective implementation of eco
nomic growth. Furthermore, this chapter evaluates mone
2?
tary and fiscal policies, not only from the standpoint
of effective government administration, but also as a
means for promoting economic development maintaining
economic stability.
Chapter IX, the summary and conclusions, focuses
attention on the theme of the dissertation, namely the
evolution of the role of the Mexican government as an
economic and political instrument in the development
process of the nation. Historically, this has been
evident since the era of independence. Each subsequent
period created its own heroes and leaders. In turn,
the leaders initiated the change most urgently demanded
in that period— often short of fulfillment due to lack
of common unity and political consolidation, as reviewed
in the conclusions. Moreover, an analysis is made of
the social and economic factors, as presented in previ
ous chapters, that promoted the importance of govern
ment in the economic sphere for a more effective re
source allocation at each stage of Mexico's economic
development. This final chapter also provides a brief
estimate of Mexico's prospective future development,
with reference to problems of economic growth in the
context of the nation's environment, conceivable poli
tical dilemmas, and government's responses to remove
roadblocks from the continued growth of the Mexican
economy.
CHAPTER II
A GENERAL SURVEY OF THEORIES OF
ECONOMIC DEVELOPMENT
The problem of economic development has been an
interest of long standing in our discipline. In recent
times, however, concern over development has become
something of a preoccupation. The current focus on de
velopment stems from two Important reasons, both related
to the future problems of development as well as to the
question of social change. The advanced economies are
concerned with the problem of maintaining steady growth
of real income along with economic stability. The less
developed economies have awakened to the monumental ec
onomic measures and social changes necessary to raise
not only the level of national income, but also the real
per capita income, while avoiding the ever present threat
of excessive Inflation.
29
Since the late nineteenth century, the record in
economic growth by the advanced economies has been
breathtaking. This is particularly true of the United
States, The rise of real income and consumer purchasing
power for goods and services during the lifetime of a
seventy-five year old person, has created a level of
economic performance beyond the imagination of the
average person at the turn of the century. Data sup
ports the fact that with less than seven per cent of
the world's population, the United States today produces
about forty-one per cent of the world's income. The
literature in the field of economics gives considerable
currency to the problem of structural unemployment,
steady growth, and inflation— together with the chronic
difficulties of fiscal and monetary policies in view
of the defense budget. But the current economic prob
lems of the United States look comparatively wan when
you consider the economic situations and social plights
that face other economies— especially those in the so-
called less developed world.
The first part of this chapter includes a brief
survey of the general theories of development. The
principal versions presented are the classical models
and those of Maithus, Marx, Schumpeter, and Harrod. The
last section develops a general discussion on the con
temporary concern and conditions of the less developed
economies. In recent times, considerable attention has
been focused on the problems of social change* One notes
this Inquiry in the current writings by some economists
and sociologists. An effort is being made to incorpor
ate the findings of other social scientific disciplines
as a means of obtaining a more catholic insight Into the
phenomena of underdevelopment peculiar to traditional
societies. In view of these recent efforts, the latter
part of the chapter discusses briefly some of these
ideas. Finally, along with the material presented in
the chapter, references are made to the Mexican case—
relating or emphasizing the particular subject at hand
with the past or current development in Mexico.
I. THE GENERAL CLASSICAL THEORY OF
ECONOMIC DEVELOPMENT
Introduction
The concept of economic growth is not a new
study— nor is it something to which the attention of
specialists has only been recently directed. Long ago
the early classical writers regarded economic develop
ment as one of the central issues in their studies. The
31
history of commercial, financial, and colonial develop
ment afforded rich sources of reference for the archi
tecture of growth models peculiar to the political,
economic, and technological aspects of the period. The
classical writers wrote at the dawn of the industrial
revolution. In general terms, there are several prin
ciples that form the texture of their theory.
The political climate essential for economic
growth rested on the principle of laissez-faire— a belief
In the natural law as a philosophy of life. This concept
was prompted by the eighteenth century enlightenment
and scientific development which held that ". . . (the)
many activities within the universe are not random
events but are ordered in obedience to some grand de-
sign.1 ' The classical writers viewed this natural
principle as a valid concept in social phenomena. In
other words, the same natural order regulated prices,
production, the supply of labor, and, consequently, most
economic affairs. The "invisible hand" of natural law
was self-love, whose undesirable effects were tempered
“ '"Stephen Enke, Economic Development (New York}
Prentice Hall, Inc., 1963), p. 71.
32
by the principle of competition. Thus, the classical
writers emphasized the efficiency of the economy through
the "correct" allocation of resources by the operation
2
of the price mechanism In competitive markets.
The laissez-faire doctrine designated the rela
tive roles of the public and private sectors. Govern
ment intervention was undesirable. Adam Smith viewed
governments of the day, and as far back as the feudal
age, as gluttons of the economic surplus denying Its
3
productive use for development purposes.-^ Indeed, the
classical school (especially Smith) felt strongly against
the restrictions arising from the mercantilists1 dis
criminations and permissive monopolization. These poli
cies had to be eliminated if private enterprise and
representative institutions were to help generate eco-
nomlc growth.
The writers of the early central tradition addres
sed themselves to a period when the social climate and
2
Bert F. Hoselitz, et al.# Theories of Economic
Growth (Illinois: The Free Press of Glencoe, I960),
pT 84.
3
-'Adam Smith, The Wealth of Nations. E. Cannon
(ed.), (New York: The Modern Library, 1937)» P- 329.
4
Hoselitz, et al., oja. clt., p. 85.
33
economic conditions were ideal for a 1 1 take-off." The
commercial revolution, a vital and almost necessary
step, had set the preconditions for rapid economic
growth. For the classical economist, economic develop
ment was a race between technological progress and popu
lation growth; while the growth process was regarded as
self-generating up to a point, a stationary state would
result as profits dropped to zero.
The division of labor, according to Adam Smith,
was closely connected to the use of capital in produc
tion, and was limited by the size of the market. In his
Wealth of Nations. Smith stressed the market*s geo
graphical area and emphasized the benefits of cheap
transportation rather than the application of capital.-*
Today, the size of the market is a major issue pertinent
to the question of incentives to invest with regard to
less developed economies. These economies, however,
have a market deficiency due to a low real purchasing
power, and not a case of deficiency of "effective de
mand" in the Keynesian sense.^
-*Ragnar Nurkse, Problems of Ca-pltal Formation in
Underdeveloped Countries (Oxford; Basil Blackwell,
1962), p. 18.
6Ibld.. p. 1?.
3^
The early classical writers, (that is, Smith and
Ricardo), of course, were concerned with the circum
stances of their times and affected by the extent of
their social awareness. Nonetheless, they were aware
of conditions necessary for growth: knowledge, respon
sible government, protection of private property, social
capital, entrepreneurial ability (although they did not
stress this factor), specialization of labor, techno
logical improvements, capital accumulation, and free
7
trade.'
However, the classical writers did not formu
late an adequate theory of growth applicable to under
developed countries. For instance, "free trade" would
not enhance economic development to a one or two-commodity
exporter of raw materials. The classical writers were
aware that growth is a unique historical process and one
that gives rise to different problems requiring different
analysis and solutions. It is notable, however, that the
classical analysis led ultimately to the concept of stag
nation— a subject to be discussed later in the chapter.
The early classical writers of economic develop
ment did not escape criticism even from the beginning.
7
'Hoselitz, et al., ojg. cit., p. 84-.
Frederick List of Germany and Alexander Hamilton of
North America disputed claims that the classical prin
ciples were applicable to a country whether it be pri
marily agricultural or industrial. The German histori
cal school was later to argue that classical economics
might be all right for Great Britain, but not necessarily
Q
for other, less developed nations. In another vein,
the late Dr. Joseph Schumpeter revealed impatience with
the classicals. "... (T)hey saw nothing but cramped
economies, struggling with ever-decreasing success for
their daily bread. They were convinced that techno
logical improvements and Increase in capital would In
the end fall to counteract the fateful law of decreasing
returns .... In other words, they were all stag-
o
nationists y
A defense of the classicals has been ventured
by many, and no doubt, with considerable poignancy.
Still, other writers might reason that the classical
writers began the spade work of economics as a formal
social science. It is true that respectable material
and general observations on a variety of economic sub-
Q
Enke, o£. clt.. p. 70.
9
^Joseph A. Schumpeter, History of Economic Analysis
(New York: Oxford University Press, 195*0 * pT 571. ' .
36
jects had been offered by writers of previous eras.
However, economic progress in modern terms was at its
infancy, and, the classicals lacked the sophisticated
techniques of modern observation and scientific data.
Leading Dimensions of the Classical
Theory of Development
A brief sketch of the classical theory of growth
was presented in the preceding section of this disserta
tion. It is necessary, however, to translate the class
ical theory of growth into a series of mutually consis
tent and interacting propositions in order to see the
economic embroidery of the classical model.
The Production Function. The classical writers
(Smith, Malthus, and Mill) envisioned output as a combin
ation of several agents. Total output depended on the
size of the labor force, the stock of capital, the
amount of available land, and the level of technique.
Labor held a key place in the classical schema. Its
Importance rested on the division of labor and labor's
productive powers. "The greatest improvement in the pro
ductive powers of labour, and the greater part of the
skill dexterity, and judgment with which it is anywhere
directed, or applied, seem to have been the effects of
37
the division of labour."'1 '0 The use of productive labor,
and the size employed, depended on "the quantity of
capital stock which is applied in setting them to work,
and (including) the particular way in which it is so
employed."'1 ' ' 1 ' Thus, Smith Implied a"level of technique"
that, Schumpeter believed, put considerable burden on
the division of labor. "(I)t is practically the only
factor in economic progress . . . technological pro
gress . . . and even investment is induced by it and is,
12
in fact, just an incident of it."
The classical writers described land— agricultural
land— as fixed. Therefore, much of their discussion of
this subject was carried on in terms of the total area
of agriculture. Subsequent writers have employed the
term land to mean "supply of known and economically use
ful resources." Since, for the classicals, land was
fixed, it was a source of constant dismay, especially to
Malthus and Ricardo, diminishing returns being the vil
lain of the piece. On the other hand, they looked at
11
manufacturing as a sector of Increasing returns.
■^Smith, pp. clt.. p. 3 . ^ Ibld., p. lvii.
12
Schumpeter, op. clt.. p. 187.
11
•'Hoselitz, et al., op. pit., p. 103.
38
The role of the entrepreneur was not entirely
neglected, although they did not spell out his stra
tegic part in the economic system. For example, the
classical writers did not make the important distinction
between the role of the entrepreneur and that of manage-
1^
ment.
Capital Accumulation Permits Technological
Progress. The early writers took a mechanistic view
of this process. They apparently believed that the
supply of better techniques and the new products to be
introduced were plentiful. However, the rate at which
these opportunities were to be exploited were limited
by the flow of savings for new investment (in the long
run, they held a pessimistic view of this process). It
follows that new net savings were needed so as to per
mit a steady advance in technology, and capitalists,
moreover, automatically Invested most of their Incomes
as long as the profit rate was above or near zero.^^
(This latter view did not escape criticism.)
The neoclassical writers refined the above analysis
and made it more applicable to the institutional envi
ronment of nineteenth and twentieth centuries. For
^Schumpeter, o j d . clt., p. 556.
■^Smlth, o j d . clt., Book II.
39
instance, savers and Investors need not be the same in
dividuals. Through capital markets, business men can
buy capital equipment with borrowed funds, and individ
uals can save by purchasing securities rather than physi
cal assets. Furthermore, the classical economists did
not include the possibility that new techniques might
be capital saving— a fact Marx also failed to include in
his schema: Consequently, the process of technological
progress was capital absorbing, whatever may be the
nature of investments."^
Investment Depends on Profits. By investment
the classical school meant net investment, or net addi
tions to capital stock--wlth profits as the inducement.
The latter was taken for granted, although Malthus at
tached much importance on the whole "climate" for in
vestments— not Just profits as "the motor." While the
existence of profits were closely related to supply of
labor and techniques in production, Smith and later econ
omists all assumed that the entrepreneur Invests with
the hope of making a profit. Moreover, the classicals
agreed on the proposition that the rate of profit must
■^Benjamin Higgins, Economic Development (New York:
W . W . Norton & Company, IncTi 1959)• pp. 90-91.
^0
fall as the economy grows. Nonetheless, their writings
were not in complete agreement on the reason for the
fall, and where they did agree, as did Malthus and Smith,
they did not predict the same investor response to the
17
decline. '
Profits Depend on Labor Supply and the Level of
Technique. The whole fabric of the economic process is
directly or indirectly related to the question of pro
fits. The degree of accents may be found in different
places--depending on the depth of insight or the school
of thought. Profits in the private sector of an econ
omy have a strong influence on investment, and hence on
economic growth. To the classical school, profits were
constantly threatened by population. As population grew,
diminishing returns in agriculture would set in, thus
raising labor costs and reducing profits. This dilemma
could be offset over time by increasing returns in in
dustry. Consequently, the classical writers looked upon
technological progress as a measure for avoiding the
effects of population pressures and diminishing returns.
Yet, the circularity of this process ends on a
pessimistic note, although the process begins optimis
tically. At the early stages of economic development,
17
'Hoselltz, et al., o j d . cit., p. 96.
41
population is small compared to natural resources, and,
therefore, profits will be higher. Eventually, however,
the working population will Increase to the point where
total wages equal total product minus rent, resulting In
no profits, even with wages at a subsistence level.
- 1 Q
Thus reasoned Malthus and Blcardo. In this reasoning,
it was generally believed that the labor force and popu
lation varied together. The classlcals were not unmind
ful of the variation in the number of unemployed. None
theless, they regarded unemployment as an aberration,
at least in a growing economy.
The Size of the Labor Force Depends on the Size
of the Ylage Bill. The classical school experienced a
wave of criticism over the concepts of the "wages fund,"
and "the Iron law of wages." The former principle
suggests that the rate of population growth depends on
the amount of money available to pay wages. Should the
wages fund increase as a result of additional returns
to capital, the real average wage would rise above the
subsistence level— thus more children would survive and
enter the labor market, which, according to the second
principle, would eventually push wages down toward sub
sistence levels again.
I8Ibid.. p. 75
This situation is a far cry from conditions In
the advanced economies of today. For the classlcals
growth seemed to Involve a desperate race among popula
tion, resources, and technology; and In the end pessim
ism prevailed. Nonetheless, the population problem seems
a fair description of what happened in the eighteenth
and early nineteenth century in Europe, according to
1 9
Benjamin Higgins.
The question of population in relation to economic
growth is hardly a dead issue. Social theorists are
aware of the classical dilemma when compared to the ad
vanced economies of today. Contemporary demographers
and economists feel sympathetic to the Malthusian theory
of population when reference is made to the economic prob
lems of low-Income countries. The popular currency seems
to be that very low-income peoples cannot help having
large families. Rostow speaks of "the standard of living
effect" as a check on population, but this idea suggests
that people have already attained a fairly high level
of affluence. On the other hand, Benjamin Higgins has
indicated that every society, whether ancient or modern,
has practiced some form of birth control when so inclined.
19
'Higgins, o j d . clt., p. 9 3.
^3
Since Malthus1 time, changing conditions have
led to the gradual evolution of a theory that postulates
a more complicated sequence of births and death rates
associated with economic development. This theory is
generally known as "the demographic transition." As
the economy develops, it has the effect of reducing
death rates through improved sanitation, medicine, the
transformation of a peasant economy to one with a greater
division of labor and markets, et cetera.
As to large families in peasant low-income socie
ties, recent studies by Ansley Coole and Edgar Hoover
indicate that the perversity of low income in an agrarian
society promotes large families. This has been typical
of Asia, Africa, and Latin America--and, of course,
Mexico until recent times. "High birth rates result
from social beliefs and customs that necessarily grow
up if a high death rate community is to continue in ex
istence . . . the burden of child care rests primarily
on women . T children contribute at an early age to
agrarian production and are the transitional source of
security in the old age of parents. The prevalent high
death rates, especially in infancy, imply that such se-
p A
curlty can be attained only when many children are born."
20Ansley J. Coole and Edgar Hoover, Population
Growth and Economic Development (Princeton: Princeton
Univ. Press’ , 1958)» PP • 9-10.
L *4
The Wages Bill Depends on the Level of Invest
ment . Schumpeter had this to say about the "wages
fund:"
The factor that governed the variation of
the wages fund, hence demand, was savings.
Therefore, given the productive efficiency
of the economic process, the course over time
of real wages (in our sense) and of the per
capita real income of the working class de
pends upon the latter*s rate of propagation
and upon the community's rate of savings.21
Thus, community's savings were put into effec
tive use through investment. The economic literature
has given considerable witness to these early theories,
There was an automatic quality in this process in that
savings usually found their way into Investment. In
other ways, in a society with perfect mobility of re
sources it was believed that a businessman would auto
matically Invest his savings.
Malthus revealed a high degree of sophistication
in his analysis of saving, Investment, and economic
growth. There is nothing automatic about economic
growth, he reflected. Growth of population was not
enough to bring economic development. "An increase in
population cannot take place without a proportionate
22
Increase In wealth," he added. Ahead of his day In
PI
Schumpeter, op. clt.. pp. 666-667.
^^Hlgglns, op. cit.. p. 100.
i +5
this subtlety, he pointed to the "underdeveloped" coun
tries such as Spain, Portugal, et cetera, where the
natural tendency toward population growth was no guar
antee that either population or income will grow. To
day, modern economists would stress the need for an in
crease in purchasing power.
Malthus revealed further insights. Speaking in
terms of the level of development in his country, he
added that population growth encourages development
only if it brings effective demand. And demand for
labor, in turn, depended on the rate of capital accumu
lation. This indicates that Malthus rejected "Say's
Law" where supply creates its own demand. Malthus did
not deny the need for saving and Investment as a basis
for economic growth. In fact, he proposed a type of
limit or"optimum propensity to save." The optimum point
renders savings for profitable Investment opportunities;
beyond this point, however, savings will reduce con
sumer spending to such an extent that investment will
be discouraged. Indeed, Malthus anticipated the modern
writings of Keynes, Kalecki, and others.
Malthus touched on the problems of underdevelop
ment in Latin America. He directed attention to the
sectoral interaction which helps to explain why low-
income countries remain underdeveloped. For one thing,
i+6
each sector relates to the market output of the other
sector. Therefore, the failure of one market to ex
pand acts as a drag on the growth of other markets.
These are familiar problems today, together with the
understanding that balanced growth is essential if
there is to be any sustained growth at all. In fact,
Malthus was well aware of the chronic drags. He said
that development in the industrial sector is limited
by the Indigence of the agricultural sector. Thus
Malthus had an early insight into the problems of
"dualism."
Total Output Equals Profits Plus Wages. This is
the identity of all the propositions expressing funda
mental causal relationships. Profits Include returns
on fixed factors of production, including land as well as
capital. This closes the classical system.
The classical propositions, or equations, suggest
a circularity, and one can break in at any place in the
circular flow. For instance, an increase in profits
promotes an increment in investment which adds to the
stock of capital. This new affluence allows producers
to take advantage of improved techniques, and thus raise
the wages fund. An increase in the latter accelerates
the growth of population, which, unhappily, results in
47
diminishing returns on the land, thereby raising labor
23
cost and forcing profits to decline.
The above circular reasoning ultimately establishes
the "stationary state"— or classical stagnation. Accord
ing to the classicals, a state of maturity is reached as
a result of diminishing returns and rising labor costs
that tend to outrun the effectiveness of technological
progress.
Current interest in early growth theories ques
tions whether growth is retarded by insufficient demand,
or insufficient supply--a situation discussed in another
section of this paper. Ricardo and Smith chose supply
and logically stressed capital formation--as seen above.
Yet, Adam Smith gave a fleeting recognition to demand,
as Professor Kindelberger has noted, in the proposition
oh
that labor is limited by the extent of the market.
Malthus, of course, was concerned with sustained demand,
a point mentioned already.
_ 23Ibld., pp. 94-96.
2k
Charles P. Kindleberger, Economic Development
(McGraw-Hill Book Company, 1965)» p . k k .
48
John Stuart Mill's view of stagnation left some
ray of optimism. While the economy might reach a sta
tionary state, where there is no increase in stock of
capital and population, and profits have reached a mini
mum, the economy might look to a rising standard of liv
ing through technological improvements and upgrading in
the art of living and leisure. Mill thought stagnation
was just around the corner (1848). In part, he was right,
but not until World War I and after. He did not suffi
ciently consider growth of the new world and foreign in
vestment opportunities provided by British investors.
However, at the time he wrote his Principles, there were
indications that England might lose trade to Germany,
the United States, and later Japan. England later be
came a rentier nation, living on the returns from its
foreign investments. The real trouble came when the
rentier income from abroad was reduced— by World War II.
II. KABL MARX AND ECONOMIC DEVELOPMENT
The major challenge to the classical theory of
economic development came from Karl Marx, whose theory
of development was the core of his intellectual system.
Deficiency in growth due to a low rate of technological
progress or lack of natural resources were to Marx merely
superficial causes of development difficulties. It is
necessary to consider the nature of the economic system
under which production takes place to discover the funda-
25
mental factors that make for development.
Karl Marx drew heavily on a materialistic inter
pretation of history. His particular concern was the
capitalistic system that, according to him, embodied all
sorts of contradictions which made successful develop
ment Impossible. Indeed, capitalism would eventually
bring about its own collapse and be replaced by social
ism .
Some of the propositions in Marx*s theory of de
velopment parallel those of the classical school— the
source of his models. There are, of course, Important
departures. One of his propositions is of particular In
terest to this section. Marx stated that the rate of
profit is the ratio of profits to wage costs plus capital
costs.
Marx argued that technological, progress was labor
saving and capital absorbing. The tendency arose, there-
25
^Robert E. Baldwin, Economic Development and
Growth (New York: John Wiley & Sons, IncT, 1966), pp.
29-30.
50
fore, for the ratio of "constant" capital to variable
of output cost, along with wages, a rise in the ratio
of capital cost to labor cost would decrease the rate
of profits unless offset by sufficiently expanded ex
ploitation of labor. Thus, Marx sought to explain the
tendency of profits to fall in this manner of reasoning
rather than by the classical explanation of diminishing
returns on land, population pressures, et cetera. It
follows that the exploitation of workers became a con
tinued policy made easier by the swelling "industrial
reserve army" of unemployed— the economic casualties of
new technology and techniques.
economic development which has wide currency In contem
porary economic literature, namely recurring business
cycles as peculiar to development. Growth, in other
words, disturbs economic stability. This has relevance
to an advanced economy (even England of Marx's day) as
well as to underdeveloped countries, although there may
be wide gaps in the level of development between the
former and the latter.
capital to rise
26
Since capital depreciation is part
Marx introduced a new approach to the theory of
51
Marx, however, did not consider the economics of
underdeveloped areas in his schema of analysis. In
essence he said that colonies were subordinates to In
dustrial countries. The former served as a safety valve
to the industrial economies— a source of raw materials
and markets for finished goods. The monotony of his ex
ploitation theory did not include the possibility of
population pressures (even as an independent factor) as
a deterrent to economic growth. On the other hand, his
predictions based on the sociological environment have
more relevance to underdeveloped conditions. For ex
ample, in the case of Mexico during the nineteenth cen
tury, labor was exploited; wages were close to subsistence
and the duality of the economy offered a large "reserve
army of unemployed; the class structure was sharply de
fined. These social and economic conditions suggest an
economy of underdevelopment more representative of Diaz's
thirty-five year regime than the case of England during
the same period. While there was evidence of "increas
ing misery" in the days of Diaz, time tells a different
story of the economies Marx wrote about.
Karl Marx's social and political writings did not
have an influence on the Mexican revolutions and reforms
during the Juarez era, 1857-1872. The leaders had dif
ferent political and economic orientations. In fact, the
bloody revolution of 1910 did not embody a "Marxist
spirit." These devastating social uprisings were the
result of their own peculiar social and economic condi
tions. While they may appear universal, they were not
insurrections for "overthrowing the capitalists" and es
tablishing a proletariat dictatorship. Marx could not
have envisioned a revolutionary government and reforms
with public entrepreneurs cooperating with the private
sector while dedicated to social and economic goals for
growth within the framework of a democratic spirit and
the market mechanism.
A country where intellectual freedom is given a
fair amount of berth will eventually develop thinkers in
a variety of "social colors." It is not surprising,
then, that modern Mexico has some Intellectuals and
leaders who Incorporated Marxian philosophy into their
social theories. One such leader is the well-known
27
Vicente Lombardo Toledano, f a labor leader born of a
comfortable middle class, Mexlcan-Italian family. But
the core of government leadership is centered in the
"Revolutionary Family" whose social goals and spirit stem
^Robert Paul Millon, Mexican Marxist. Vicente
Lombardo Toledano. (Chapel Hill: The University of
North Carolina Press, 1966).
53
from the Revolutionary Creed based on the broad pro
visions of the Mexican Constitution of 1917-
III. JOSEPH A. SCHUMPETER
AND UNSTABLE GROWTH
As one of the outstanding economists of modern
times, Joseph A. Schumpeter attempted to bridge the gap
between the Marxian and neoclassical theories of econom
ic development.
In another section of this chapter It was seen
that the classlcals (and later the neoclasslcals) pre
sented a gradual process In economic development. In
the Schumpeterian schema, however, growth suggests changes
by leaps and spurts, thus sweeping the economy to higher
standards of living. Among the most glittering examples
of this leaping process are the advent of the railroads,
the automobile, electronics, new chemical processes, auto
mated assembly systems, new marketing techniques— all of
which form the basis for the swells In autonomous invest
ment by entrepreneurs. But such an outburst of economic
exuberance reaches a shocking point— swinging the economy
in a reverse direction in a rhythm known as the business
cycle.
The process of growth described above Is dependent
on two key factors according to Schumpeter: innovations
and entrepreneurship. The former is the cornerstone of
a theory of capitalist development. Innovations are the
basis for explaining the recurring business cycles,
characteristic of the capitalist system in the course
pO
of development. The entrepreneur's role is to innovate
He is neither an inventor nor a capitalist who would
necessarily furnish investible funds, although a partic
ular entrepreneur might also fulfill these roles. The
essence of entrepreneurship is creating something new in
29
the market place.
Schumpeter's Propositions
Some of Schumpeter's propositions adhere to the
general concepts of Marx and the classical school. The
resum^ of the following propositions are more Schumpe-
terian--in the sense that he placed his own particular
emphasis on them.
Total Investment May be Divided into Induced In
vestment and autonomous Investments. This particular
distinction marks one of Schumpeter's contributions de
signed to distinguish the different circumstances and
28
Edward Shapiro, Macroeconomic Analysis (New York
Harcourt, Brace & World, Inc., 1966), pp. 2o9-270.
^Baldwin, ££•• clt., p. 36.
55
motivation for investment. Induced investment may stem
from changes in market behavior such as more income,
sales, and profits. Autonomous investments stem from
long-run considerations such as technological change.
Producers have limited criteria as basis for determining
the efficiency of the investment.
Induced Investment Depends on the Level of Profits
and the Interest Rate. The gap between profits and the
interest rate is of crucial importance in determining
induced Investment. The principle conforms with the
classical theory; as profits rise, induced investments
tend to Increase, and to drop when the interest rate
rises. Quantitatively, the larger the capital accumu
lated, the bigger must be the excess of profits over
interest to Induce more Investment. All does not go
well, however. A snag appears inevitably, according to
Schumpeter. If an economy were to continue year after
year without innovations, a sort of capital saturation
is reached where extra net capital adds nothing to out-
3 0
put, especially if population is constant, Schumpeter,
however, did not put much stress on population; he did
3 0
Enke, o£. clt., p. 96.
56
not deny that population growth may induce long-run
investment, but he did not attach much weight to this
factor. He chose to regard population growth as an
11
"external factor,"
Autonomous Investments Depend on Resource Dis
covery and Technological Progress. This is a key point
for Schumpeter, for innovations are the mainspring of
autonomous investment. This process makes for a change
in the production function which brings an increase in
output. "Development through innovation," Schumpeter
said, "is a spontaneous and discontinuous change in the
channels of flow, disturbance of equilibrium, which for
ever alters and displaces the equilibrium state previ-
32
ously existing."
The entrepreneur, the rate of profits, and the
social climate upon which the supply of entrepreneurs
depend are among the other important propositions in the
Schumpeterian schema. Marx did recognize the entre
preneurial function, but he did not place the particular
stress on It as In the case of Schumpeter.
-^Higgins, o j d . clt., p. 127.
32
Joseph A. Schumpeter, The Theory of Economic
Development (New York: Oxford University Press, 1961),
P. "64.
57
Modern economists have questioned the relevance
of Schumpeter’s growth theory to the problem of develop
ment of the underdeveloped economies. The literature
suggests that the idea of innovations is applicable to
the less developed economies in the context of their
social and economic environment. For example, an inno
vation may be fruitful if it entails better ways of im
proving the techniques of production at their level of
development and resource availability— and, if changes
are not too radical to start with.
Moreover, entrepreneurship in a less developed
economy can mean the ability to discover new opportun
ities, and to promote new ventures with an eye to suc
cess within the current means of resources and market
33
possibilities. On the other hand, the underdeveloped
world is not representative of the Schumpeterian schema
of economic development and the society to which Schum
peter addressed himself. The entrepreneurs of the former
are not original innovators because they obtain their
3k
technology ready-made from the industrial countries.-'
33
-^Harvey Lelbenstein, Economic Backwardness and
Economic Growth (New York: John Wiley & Sons, Inc.,
1963). P. 121.
3k
David E. Novack and Robert Leckachman (Eds.),
Development and Society (New York: St. Martin's Press,
196^), p . 98.
58
In fact, the industrial entrepreneurs have led the more
advanced economies to new trails of success with new in
ventions and opportunities that are not necessarily ap
plicable to the pathbreaking essential to economies with
less developed resources and smaller markets.
Some Innovations have their roots on scientific
discoveries. At this level of research only advanced
economies can afford high powered laboratories with ad
vanced technical equipment and scientists who, for in
stance, may discover the behavior of high-frequency radio
waves, the collision of atomic particles, et cetera.^
For an underdeveloped economy, a lesser degree of effort
is needed to apply existing technical knowledge, than,
for example, to Initiate a complete innovation. There
fore, adaptive entrepreneurship has more meaning to an
underdeveloped economy than the Schumpeterian type, es
pecially at the early stages of economic development.-^
Modern Mexico tends to fall into the "adaptive"
entrepreneur category, especially since the 1930’s, Her
rapid rate of growth stems in part from the adoption of
foreign technology, techniques, agricultural soil chem
istry, and new retail marketing methods. Since the 1950's
3 5
-'-'Enke, ojo. clt.. p. 100,
O
Novack, Lechachman (Eds.), op. clt.. pp. 98-99,
59
Mexican industries have been producing much of their
capital goods, Including refinery equipment, turbines,
dynamos, tractors, and earthmovers.
IV. THE HARROD MODEL OF GROWTH:
AN INTRODUCTION
The growth theory of Sir Roy Harrod is concerned
with the problems of secular stagnation and inflation,
especially in advanced economies. His theory intro
duces additional insights into the question why the cap
italist development tends to be irregular, and, therefore,
the question of how to maintain steady growth in an ad
vanced economy without excessive inflation. Harrod con
tends that advanced economies will be faced with the
problem of a "chronic deflationary gap" (and by inference,
that underdeveloped economies to be plagued by a chronic
inflationary gap), unless appropriate policies are pur-
17
sued. '
The Harrod model concentrates on the explanation
of secular trends. In view of this, his theory explains
the secular causes of unemployment and inflation, and the
factors determining the optimum and the actual rate of
capital accumulation.
37
^'R. F, Harrod, Towards a Dynamic Economics (New
York: St, Martin's Press, 19^8), pp, v-vi.
6 0
Lord. Keynes and Growth
Trends in (net) savings are of particular sig
nificance to Harrod in view of its effects on consump
tion and income. The relation of trends in new savings
to trends in new capital requirements is obviously of
major importance in determining whether or not there will
be steady growth. Harrod went further than the Keynesian
analysis. The latter focused attention on the aggregate
demand-creating effects of Investment. Little is said
in that analysis, for example, about the fact that in
vestment also increases the aggregate output capacity of
the economy— a major point with Harrod. Keynes was main
ly concerned with the problem of utilizing fully the
labor and capital stock already available.
Nicholas Kaldor has this to say: "... (Micro
economics cleared the way to a new approach to a theory
of growth but, apart from a rather isolated attempt of
Harrod, most Keynesian economics for the first ten or
fifteen years after the publication of the General Theory
were more concerned with the explanation of cyclical
fluctuations than with economic growth.1 1 Mr. Kaldor
O O
Nicholas Kaldor, Essays on Economic Policy.
Volume I (London: Gerald Duckworth & Co., Ltd., 196*4-),
pp. 167-168.
61
added that his own ideas on growth owe much to the
pioneering essay of Sir Roy Harrod— perhaps more for
the stimulus it provided to fresh thinking, than for
39
its assumptions or conclusions. ^
Elements of the Harrod Model
The Harrod growth model suggests the principle
of dual effect from net investment. In other words,
net investment constitutes a demand for output, but also
Increases the capacity of the economy to produce output.
For example, the production of capital equipment and new
factories Induce a demand for the materials necessary for
their production. Once the factories are constructed and
equipped, the economy’s productive capacity Is expanded
during that period— thus Increasing the following period's
potential output.
The above reasoning follows Harrod's analysis.
Assuming full employment, of course, Harrod observes
that Income in the present period Is insufficient for
the following period because of the additional produc
tive capacity created presently. How much more spending
will be needed each year than the year before? The an
swer depends on the extent to which the capacity is
39Ibld.
^0
Edward Shapiro, Macroeconomics Analysis (New
York: Harcourt, Brace & World, Inc., 1966), pp. 5^8-^9.
62
raised, by each year's net investment. In other words, it
Is essential to know how much additional output is made
possible by each dollar of added capital.
Harrod declared that the spending required in
the following period, in order to maintain full employ
ment, could be determined by the relationship between
capital and output, that is, the capital-output ratio.
This ratio tells the amount of capital required to raise
a certain amount of output, or income.
The model itself has three components, or, in
essence, three relationships! (1) the savings-income
ratio (S/Y), which can be represented by the small
letter s; (2) the capital-output ratio (cLK/dY or I/dY) ,
which can be represented by the small letter k; and (3)
the growth rate (dY/Y), which can be represented by the
ki
small letter g.
According to the above outline, Harrod*s analysis
indicates that investment in the current period is de
termined at the equilibrium level of national income by
the marginal propensity to save; and economic growth
becomes a function of the marginal propensity to save
and the capital-output ratio. In other words, actual
S = actual I at all times (it is assumed that average
propensity to save is equal to marginal propensity to
^Ibid.
63
save), and therefore S/Y = I/Y— represented by the same
decimal fraction s. Harrod1s model further Indicates
that the capital-output ratio is the "gear ratio" that
connects investment (I) with increases in output (dY).
The equation for equilibrium growth can then be
stated as:
This formula expresses in percentage terms what one
might be aware of in dollar terms. In other words,
with an incremental capital-output ratio of 2, and a
marginal propensity to save of 1/10, the equilibrium
growth rate is: 1/2 x 1/10 = 5 per cent. Thus, with
a rate savings of 10 per cent, a capital-output ratio
of 2, and an increase in population, say, of 2 per cent,
the economy can increase real income at a rate of 3
i±2
per cent per annum. Kindleberger puts it another
way: Saving leads to an increase in investment, which
leads to an increase in income (through the incremental
capital-output ratio), which leads to more saving, more
investment, more income, et cetera.
g = s/k
op. clt.. p. 297
Ibid
6k
Restating the above analysis differently, the
growth rate depends on three things: (1) the amount of
savings forthcoming at full employment income: (2) the
investment demand at full employment income (this must
be equal to the amount being saved— otherwise the econ
omy will experience a slump); and (3) the economy’s
technology which determines the productivity of the newly
produced capital goods. While these three factors inter
relate with one another for the total desired effect,
the savings factor is still strategic to growth. But
savings alone will not insure an increase in growth rate.
The model indicates that if investment demand falls to
rise at the same pace as savings-income ratio, the re
sults will not be growth, but a decrease in income and
employment.
Contemporary Criticism of Harrod*s Model
There are writers in economics who see serious
limitations to the use of a constant capital-output ratio
for predictive purposes. Professor Robert Baldwin sees
increases in output not only from capital accumulation,^
but also as a result of quantitative and qualitative
changes in natural resources, the labor force, and tech-
kk
Baldwin, op. cit., pp. kk-k$.
65
nology. Moreover, the structure of production also
changes considerably as development effort proceeds.
This point may be applicable to the case of less de
veloped economies. Mexico, for Instance, Is becoming
a domestic producer of capital rather than a capital
importer--as was the case in the past. Moreover, In
ternal resource development has proceeded at a fair
pace, in addition to better integration of the produc
tive sectors of the economy, thereby changing the struc
ture of cost over previous periods, a condition that at
this stage of Mexico's development may have induced a
change in the capital-output ratio.
Indeed, the Harrod model paints a gloomy pic
ture. Harrod has little to offer by the way of long-
run policy to fill a chronic deflationary gap— with
savings as "the devil of the piece." He is pessimistic
of declining interest rates--as savings will not react
sufficiently to a falling Interest rate.^ Yet, accord
ing to Dr. Higgins, it Is In the reduction, and ulti
mately abolition of Interest, where Harrod offers the
only real solution for chronic underemployment.^
4-5 ,
-Higgins, op. cit., p. 160
4-6
Ibid.
66
Commensurate with the deflationary gap dilemma,
it is of glaring interest that the Harrod model omits
the government sector entirely. For an advanced econ
omy, as well as for the underdeveloped world, the Harrod
schema assumes an economy where the public sector is en
tirely neutral, while obviously this is not the case.
Government is not at all neutral in the affairs of the
American economy; it stands ready, through the Employ
ment Act of 19^6, to come to the rescue in the event of
growing instability. A government can Influence the
growth rates, for instance, by altering the composition
of private spending through tax cuts or tax increases,
or by changing the level of spending.
Notwithstanding critical writings, the Harrod
growth model is useful as a general guldepost in the
study of development in an advanced economy, and points
to crucial factors in growth. A failure of the real GNP
to rise indicates an unhealthy state in the economy.
Total spending must not only grow; it must grow fast
emough to induce the business community to keep increas
ing capacity at the same rate. And by Inference, the
model suggests that a free-enterprise economy left to its
own devices, and sometimes contradictory actions, may
not achieve steady growth. Yet Dr. Kindleberger objects
67
to Harrod1s schema on technical grounds: (1) the model
relies largely on a capital theory— labor is introduced
into the system only at a constant capital/labor ratio;
and (2) as mentioned previously, growth proceeds faster
than can be accounted for by the rate of inputs of capi-
4-7
tal with constant capital-output ratio. 1
Beyond these criticisms, the Harrod model is by
far more meaningful to advanced than to underdeveloped
economies. Its basic assumptions do not necessarily
coincide with the level of development of most of the
less developed economies.
V. UNDERDEVELOPMENT: SOCIAL ASPECTS
Underdeveloped economies vary in their levels
of economic status, in their ripeness and suitability
for development, and, in the promise af profitable re
turns to capital investment. Some countries promise a
very small return due to their low economic state.
The development theories discussed in this
chapter present no special theory or method of analysis
entirely suitable for the study of underdeveloped econ
omies . There are a number of economists who are attempt-
47
Kindleberger, o£. clt.. pp. 48-49.
68
ting to fashion, with traditional tools of analysis,
new methods of application to growth, although the data
they have to consider may be limited. Nonetheless, in
view of the limitations, economists are forging ahead
with their effort. Henry J. Burton, for example con
siders three aspects of growth of output: (1) the
sources of growth; (2) the conditions for these sources
/ \ 48
to be effective; and (3) the modus operandl of growth.
These aspects, of course, entail more insight
into the "partial theories" that help to explain the
conditions and economic state of poor economies that
to a large extent depend on subsistence measures. But
even at this economic level, the study of development
is mainly the study of the supply side: quantity and
quality of labor, change in quality of capital, new
technical knowledge, et cetera. Equally important,
however, are the changes in the environmental factors:
rigidities of the "traditional society," the social
psychology of people, for example, work habits, and
changes in the environment essential for the rise of
the entrepreneural class— all of which affect eventually
the productivity of capital and labor.
4-8
Henry J . Burton, Principles of Development
Economics (Englewood Cliffs, N.J.: Prentice Hall,
Inc., 1965)» pp. 80-81.
69
The introduction to this chapter suggested an
urgency for economic development. The question of how
to approach the pressing needs of new nations plagued
with low incomes and general stagnation has gripped
practical thinkers as well as the conscience of the in
tellectual world. This concern is not due to any sudden
discovery of the extent of poverty around the world, but
rather to changes in social attitudes towards its ex
istence. The facts on poverty have always been avail
able. The change in attitude came about after World
War II, together with the gloomy prognosis by demographers
on the future rate of population growth. Too, the obvi
ous difference in the standard of living between the ad
vanced and the less developed economies induced the
latter to "demand" assistance from their more fortunate
neighbors. National emotions have been accelerated.
Citizens of poor countries have cited their colonial
history or "economic imperialism," and charged that the
advanced economies had not only neglected their economic
welfare, but also that the growing industrial nations
had used their greater economic and political power to
obtain an "unfair" share of the income gains
4,0
Baldwin, o j d . clt.. p. 1,
70
Professor Harvey Lelbenstein has reflected that
we can hardly exaggerate the urgency of the problem. In
many countries "economic development" has become a matter
of public policy. In recent years vast International
organizations have been created precisely for this pur
pose.^0 The urgency for growth seems to suggest a
frightening race between resource development and the
mounting millions of new births. The uncertainty of
winning the race hangs like a specter over the world
community. Yet much of this concern is carried on in
the absence of what would generally be recognized as an
effective theory of growth for underdeveloped economies.
"Indeed," Dr. Lelbenstein stated, "if we may be per
mitted to speculate on the matter, we suspect that the
urgency of the problem, and the almost frenzied nature
of some of these activities, militate against the de
velopment theory. Where there is a sense of urgency
there is little room for seemingly Idle and disinterested
speculation. . . . Yet it is often this kind of specu
lative exercise, divorced from practicality or reality,
in the narrow sense, that leads to formulations that can
serve as an Integrating device for the study of 'the
facts', and for the evaluation of practical policies."^
-^Lelbenstein, op. clt.. p. 2. -^Ibld.. pp. 2-3.
71
The anxiety over the urgency for development,
and hence, the stress on policy, is no doubt an unreal
istic approach on the part of some poor countries. Per
sistent preoccupation with practical problems has prob
ably contributed to a reaction against the methods of
post-classical economists, or even methods and types of
foreign aid. However, the concern with Immediate issues
of policy is often detrimental to the advance of syste
matic inquiry and especially of the methodology of the
subject. On the other hand, the unrestricted appli
cation of development theories, reputable as these may
be, but oriented to environments peculiar of advanced
economies, are likely to fall in the desired effect.
In recent times a greater attention has been focused by
professional economists on factors and influences which
previously had been relegated to institutional litera
ture, or left to other disciplines.
In the case of modern Mexico, the "urgency" for
development stands at a different level than many other
less fortunate countries. At this stage her develop
ment is not the "bootstrap variety." There are several
reasons for this. In the 1920's Mexico appeared in close
52p eter T. Bauer and Basil S. Yamey, The Economics
of Underdeveloped Countries (Chicago: The University of
Chicago Press, 1957), p. 11.
72
parallel with the economic plight of many of the less
developed countries. She had, however, certain advan
tages and experiences.
The Diaz era (Chapter V ) saw the development of
important social overhead capital, such as the 15,000-
mlle railroad system. Foreign mineral development in
troduced valuable experiences to the enterprising popu
lation, together with the development of small, domestic
industries and trades. Electric power development was
definitely established. Steel, coal, and cotton were
developed as major products of the nation. Banking re
forms curbed the power of local monopolies to issue
money, and substituted a more Impersonal and extensively
regulated banking system. Another significant step
was the breaking up of local trade monopolies.
At the social level, modern Mexico has attained
stable government through the institution of a one-
party system, a political coalition that marks a great
departure from the social disturbances and destruction
of the past. (Diaz obtained political stability during
his regime, but by strong dictatorial measures), Today
the Mexican government is unequivocally committed to the
53
^Raymond Vernon, The Dilemma of Mexico's Develop-
ment (Cambridge, Massachusetts: Harvard University Press,
1963), P- 52.
73
objective of economic growth. Moreover, it consistently
accepts the responsibility for the major course of action
which bears on economic and social development.-' In a
sense, the state and the economy have become partners.
But this unique role of government has had a long and
embryonic period of social violence as shall be described
in later chapters. Thus, the evolution of the political
and economic role of the Mexican government may be found
in the social conditions of the past.
^ Ibld., p. 8.
CHAPTER III
THE PHYSICAL AND HUMAN GEOGRAPHY
The physical contrast and the extremes in cli
mates are two of the more unique geographical features
of Mexico. There are regions where tropical rain
forest is contrasted by perpetual snow in the upper
highlands; while a day's ride may find the traveler in
an arid landscape.
Romanticists have often referred to Mexico as a
land of contrast: of mountains and deserts, of snows
and tropical heat, and of wealth and poverty. These
sharp contrasts, as often mentioned in the past, have
been a source of severe economic and political problems.
On the other hand, sharp physical differences may
suggest practical advantages in terms of economic effort.
For example, a variety of climates and terrain can lead
to diversification of economic effort as a broader base
in the development process.
The present chapter discusses the physical
geography of Mexico, including its basic resources, and
75
contains a brief presentation of the distribution and
composition of Its population. At the end of the chap
ter, Mexico is divided into regions peculiar to their
setting in terms of people and environment.
Following the introduction, the chapter presents
a background of the physical assets and liabilities
vested in the nation. The second section deals with
the size and composition of the Mexican population— a
factor of importance to a nation that has seriously
undertaken definite action towards social and economic
growth. The third section discusses sectionalism or
regional distribution in geographic as well as cultural
terms. Succeeding chapters include several references
to the political and economic significances of section
alism.
Today, these regions present a variety of social
and physical conditions In the process of economic
development. Some sections of the country lend them
selves to faster and more productive economic growth
than others, as observed in the geographic and demo
graphic discussions Included in the present chapter.
Thus, the general theme of the above serves to reaffirm
the dilemma of structural economic development not
unfamiliar to most underdeveloped areas. And this
76
dilemma will be discussed In the concluding section of
this study.
The resource base described In the latter part
of the chapter accounts for the agricultural land in
use as well as the nation's natural reserves and agri
cultural use potential. The general discussion on
demography, terrain, physical obstacles, the cultural
climate of various areas serve as a frame of reference
to budget expenditures on social overhead capital, or
on resource development by public or even private enter
prises (often through the aid of government credit),
all of which are discussed in later chapters.
I. PHYSICAL GEOGRAPHY
The Federal Republic of Mexico (Los Estados
Unidos Mexicanos) is situated in the southern part of
North America. The Mexican-United States frontier,
about l,6l4 miles long, slopes downwardly from the
Pacific Ocean to the Gulf of Mexico. The southern
boundary faces the border lines of Guatemala and
British Honduras, extending a distance of about 70^4-
miles. If one were to travel in a straignt line, the
distance covered from the northern to the southern
frontier would be about 1,900 miles. The physical
77
shape of Mexico as seen on a map resembles a large horn
of plenty--a revealing symbol of the nation's potential
wealth.
Mexico is politically divided into twenty-nine
states and two territories, and covers an area of
763,9^ square miles. In size, Mexico is the fifth
largest nation in America, and the eighth largest in
the world.1 Latin America, Brazil and Argentina are the
only countries with a larger land area. Roughly, Mexico
is about a quarter the size of the United States.
Physical Features
Artists the world over have captured on canvas
the spectacular beauty of the mountains of Mexico. The
sheer grandeur of its mountains lends to that nostalgic
phrase: "Mexico is a land of contrast." Unfortunately,
aesthetics do not always mingle with demanding needs of
life, or the economic realities. Prom the standpoint of
economic development, the mountains of Mexico are a dom
inant physical feature of nearly the whole of the country
with the exception of the Yucatan peninsula and the
northern mesa. Until recently, the mountain ranges have
been an obstacle to communication and trade. Today, the
^The Nagel Travel Guide Series, Mexico (Nagel
Publishers: Geneva-Paris-New York, i960Ti p. 15*
78
need still persists for additional extension of commun
ications conducive to further development of the hinter
lands and their resources.
On the other hand, the mountains and plateaus
present a desirable feature. Most of the population
lives in the altitudes from 1,500 to 8,000 feet. For
the most part, life at sea level is unbearable for good
health and energy when faced with tropical heat and trop
ical rain-forest climate. It is notable, on a world-wide
basis, that the most productive belt falls into the temp
erate zone. Yet, while Mexico lies within the subtrop
ical and tropical belts, the Mexican economic geography
reveals a variety of agricultural products, both from
the humid tropical low lands and the mountain plateaus.
Such a contrast stands favorable with future economic
development.
The mainland of Mexico has three mountain ranges
and a large central plateau. Two of the ranges extend
from north to south, meeting at the south-central part
of Mexico forming a "V" shape In the area where Mexico
City Is located. The Western Sierra Madre (Sierra Madre
Occidental) begins just south of the United States bor
der on the Pacific side. This formidable range presents
a wide contrast with its deep gorges, high plateaus,
79
peaks, pasture lands, and forests. Although in the
desert, the Western Sierra avoids the drought by its
elevation and its climate resembles the type found on
2
the edge of the subtropical zone.
The Eastern Sierra Kadre (Sierra Madre Oriental)
also descends from the north on the eastern side of
Mexico. (Between the two ranges in the north lies the
great northern mesa.) This range is less forbidding
than the Western Sierra. The elevation is not as high,
thus affording access to the Gulf of Mexico through a
3
few well-worn routes from the early mining days. The
trade winds from the gulf form precipitation which bathes
the eastern slopes. Some of this rain falls on the
plains or the thirsty plateau. But due to excessive
rains on the coast, the eastern coastal plains are cov
ered with thick tropical raln-forest.
La Sierra Madre del Sur (the Southern Mountain
Range) extends along the pacific coast toward the Isthmus
of Tehuantepec--an area close to the Guatemalan border.
The range begins at the "V" point, where the two northern
2Ibid.. p. 23
3
Howard F. Cline, Mexico (New York: Oxford Uni
versity Press, 1963)» P- ^0.
80
ranges meet In the Valley of Mexico area, and extends
to the south crossing the states of Colima, Mlchoacan,
Guerrero, and Oaxaca. The mountains form a comparatively
narrow coastal range, often Inaccessible and uncomfortably
humid. The southernmost part of the Sierra rises to
spectacular peaks of 18,000 feet before the range falls
away at the border of the state of Chiapas, the state
adjacent to Guatemala.
The southern part of Mexico experienced the
least stimulus In economic development as compared to
other regions. The reason for this will be a subject for
discussion In the latter section of this dissertation.
In passing, casual observation indicates that the formid
able mountain terrain and the tropical forest have made
communication extremely difficult. It is noteworthy that
h
this is the most "Indian" part of Mexico.
The Yucatan Peninsula Is the largest land area
at sea level. Rich in history, it was a part of the
Mayan empire. Today It Includes the states of Yucatan
and Campeche, and the Quintana Row territory. Until
recent times this section was isolated from the mainland
of Mexico, in a manner of speaking, because of its
**Ibld., p. 57
81
Inaccessibility. The southern part of the peninsula has
been one vast swamp, challenging rail and highway commun
ication. As a step toward modern development, a railroad
was built In 1953» which connects the peninsula with the
mainland of Mexico. Similar to the situation in the
southern highlands, efforts toward economic growth and
resource development have been rather pale.
The Peninsula of Baja (lower) California is that
arid and simi-arid mountainous tongue of land extending
south, about 800 miles long. It is separated from the
Mexican mainland by the Gulf of Lower California, centur
ies ago It was known as the Sea of Cortes.For the most
part, the peninsula is mountain-rugged: a desert terrain
that Is seldom visited by rainfall resulting In sparce
vegetation. The mountains rise to an altitude of 10,000
feet where good quality pine Is often found. Agriculture
on the whole Is dependent on obtaining water, a commodity
extremely limited. Consequently, the boring of wells is
a wide-spread practice. As for the possibilities of
economic development, Baja California has good potential
in agriculture, depending, of course, on new sources of
water. Moreover, the peninsula is reputed to have large
5Ibid., p. 39.
82
reserves of petroleum.
Climates of Mexico
A person travelling from the northern to the
southern part of Mexico will find that temperatures do
not rise unless altitudes decrease. At sea level, tem
peratures will become hotter as a person travels towards
the equator. However, since a good portion of Mexico
Is mountainous, climates vary from hot and humid tropic
areas to some very cold spots. Good climates, therefore,
are found in the mid-highlands, but this is not the sole
criterion for a good living environment. Rainfall is
equally important.
The rains in Mexico range from a few meager drops
in the northern desert (state of Sonora) to an annual
deluge of l6.*J- feet at Usumanclnta in the Grijolva River
Valley in the south.^ On the whole, rainfall is insuf
ficient to irrigate the arable land available. The
average annual rainfall for the nation is about fifty-
nine inches a year— but this average is the result of the
extremes mentioned above.^
^James Norman, Terry1s Guide to Mexico (New York:
Doubleday and Company, Inc., 1965)* P- 67.
?Cllne, o j d . cit. , p. ^3-
83
Irrigation Is an area In which large portions of
social overhead capital have recently been spent by the
central government in the northern part of Mexico. Yet,
much more planning in land reclamation needs to be
accomplished— a subject for later discussion in this
paper.
As with other physical and social contrasts in
Mexico, climates offer a variety of environments, not
altogether detrimental, but to the advantage of the
country. It has been noted that the mountains offer
cooler climates that lend themselves to better health
and physical energies. And, moreover, cooler climates,
as found in the highlands and semi-tropical deserts of
the central plateau, afford a variety of agricultural
crops not possible in the humid low lands and coastal
areas.
Similar to most of tropical America, Mexico has
classified its territory into three broad zones or
tlerras (lands). The low lands are tlerra callente (hot
lands) at below 1,500 feet with mean temperatures of
77° - 90° F. Tlerras templadas (temperate lands) lie
between 1,600 to 6,000 feet. The mean temperature is
about 70° - 75° F., and seldom does it ever fall to the
freezing point". Tlerras frlas (cold lands) scale altl-
8^
tudes above 6,000 feet with a mean temperature of 65°»
occasionally dropping much lower. Above the three zones
lie the frozen lands where little grows because of the
constant low temperatures.
In view of the discussions above, it is not sur
prising that the major portion of the population of Mex
ico clusters in the temperate zone, and to a lesser
extent in the semi-tropical plateaus. Most of the sea
coast, and in particular, the gulf coast, is generally
unattractive because of the heat, disease, and the rapid
ly leaching soil.
The Land Characteristics
The terrain and climates of Mexico can be com
pared with the rest of Latin America, and, not surpris
ingly, one finds remarkable similarities. These simi
larities may be of passing interest at this juncture, to
be sure. It is a provoking note, however, because many
of the Latin American republics are pressing for econo
mic growth and social change with conscientious effort.
And moreover, with the exception of Uruguay and Argen
tina, the countries to our south share many problems In
common.
Of further Interest, It Is not known how much
land area is suitable for agriculture. Only a small part
85
of Latin America thus far has been made a subject of
social surveys. Limitations to land use are obvious
when half of Latin America is found in dense jungle
areas known as tropical raln-forest. One encounters no
difficulty in drawing close parallels in the case of
Mexico and land utilization.
Not all of Latin America, and Mexico herself,
is situated in the humid tropics. A considerable area
is covered by rugged mountain terrain, a feature that
does not lend itself to crop suitability. On the other
hand, the Mexican highland can often be used as pasture
land (depending upon the yearly rainfall); thus, a com
pensation due to the ruggedness of the landscape, and
an attractive feature as well.
Yet not until recent times, as late as the
1920Ts, was there a wide-spread belief that Mexico held
"unlimited" opportunities in agriculture.® Since then
efforts have been made to assess and compile a land
Inventory. The truth of the land problem has come into
focus in the works of Luis Yanoz Perez (1950), and Ar
mando Gonzales Santos (1957)* The reserch of the above
capable investigators reveals that, compared to its
®Cllne, o£. cit. , p. 45.
86
total land area, Mexico has a small percentage of land
"base for domestic utilization.
Mr. Yanoz Perez's report Indicates that more
than 30 per cent of Mexico's land has no value to agri
culture. About 1*4-.2 per cent is potential cropland.
With maximum effort properly spent in terms of social
overhead capital and private initiative Mexico may
realize about 72 million acres of good land for cultiva
tion. This is nearly twice the arable land under culti
vation in i960.
II. DEMOGRAPHY OF MEXICO
Population growth In Latin America as a whole
for the last thirty years has been short of a mild
shock. Demographers anticipate a still larger rate of
propagation during the next decade. Unless more inten
sive clinical measures are undertaken, the pressure on
resources for sustaining the real income already attain
ed will be unbearable. Under these circumstances econom
ic development offers little reward for the efforts made
by the Latin American economies.
The Population Growth of Mexico
In the past, population statistics from His
panic America have left much to be desired. During
87
recent decades, however, modern techniques and serious
application have improved census taking. Available
data indicates that Mexico has experienced steady growth
during the present century, but during the last thirty
years the country has propagated at an astonishing rate.
Population estimates for 1965 are about 36 m i l l i o n : ^
thus, Mexico holds the largest population of Spanish
speaking America.
This situation presents two possible results:
(1) serious pressure on future resource development if
demographers are correct in their forecast of the 1980
estimates; or, (2) should the economic rate of growth
equal the crude natural rate of population, Mexico will
be able to undertake national and international pro
grams impossible to sustain by smaller sister coun
tries.^
According to the i9 6 0 census, total population
increased on an average of 3 per cent per annum from
1950 to i9 6 0. Urban population rose much more rapidly,
4.7 per cent, as compared with the rural, 1 . 5 per cent.
^The Inter-American Bank. "Institutional Reforms
Social Development", Washington, D.C., p. 215.
•^Cline, o j d . clt., p. 8 2 .
88
On the other hand, economic growth rates have not been
constant for the same decade due to circumstances dis
cussed later. For example, during the first five years
of the 1950's the nation's per capita product regis
tered a mean annual growth of 3*6 per cent. From 1956
to 1961, the rate was 2.5 per cent. This hardly cov-
11
ered the increase in population.
Population growth during the nineteenth century
bears a sharp departure from the growth rates of the
post 1920's. In 1805, Mexico's population stood at 5.5
million. Nearly seventy years passed before nine mil-
12
lion was attained. One reason for such a low rate
lies in the radical social transitions of the times.
During the first three-quarters of the nineteenth cen
tury the nation experienced a war of independence,
civil wars, foreign interventions, political instabil
ity, and economic stagnation.
There is another consideration. The classical
•^The Inter-American Bank, op. clt., p. 216.
12
Patricia Faith De Flores, "Mexican Costume:
Its Development from Pre-Colombian Times to the Present
as an Expression of the Blending Cultures." "Unpublished
Master's Thesis, Stanford University, Palo Alto, 19^9.
economic theory on population, generally associated with
Robert Malthus, held that as income rises among the poor
classes, birth rates tend to rise, but death rates de
crease. Since Malthus*s time, there has been a gradual
evolution of the theory that analyzes more complicated
conditions of births and deaths as related to economic
development. This is known as the theory of the "demo
graphic transition." It holds that an agrarian peasant
economy has high average death rates which fluctuate in
relation to variation in crops, epidemics, et cetera.
The high birth rates in a peasant economy, however, come
from social beliefs and customs. Many children are
necessary in order for a percentile to survive who will
contribute to the agrarian production, and also serve
as a source of security in the old age of the parents
as w e l l . Accordingly, an agrarian low-lncome economy
has high mortality and fertility patterns (before econ
omic development) that approximate the Malthusian theme.
In other words, high birth and death rates sustain very
slow population growth.
•^Ansley J. Goole and Edgar M. Hoover, Popula
tion Growth and Economic Development in Low Income
Countries (Princeton. N.J.: Princeton University Press,
1958), pp. 9-10.
90
During the nineteenth century Mexico was largely
a collection of small isolated villages. While the
country did not conform entirely to the theory of "demo
graphic transition," namely a high degree of self-suffi
ciency, and a relatively unimportant role of market ex
change, there is reason to believe that the theory has
strong bearing on the almost stagnant population growth
during the first three-quarters of the nineteenth cen
tury.
By the 1920’s, a strong measure of political and
economic order returned to Mexico after the Revolution
of 1910. The restoration of civil order and the reor
ganization of social and economic life have resulted in
a population explosion, as noted previously, that
threatens the economic health of the nation. Some demo
graphers predict that the number of people will soar to
55*7 million by 1980. This would be a 217 P®** cent in
crease, taking the population base of 25.6 million in
14
1950.
It has been noted that the absolute increase in
population in Mexico did not depend to any significant
degree on foreign immigrants, as has been the case with
14
Cline, 0£. clt.. p. 84.
91
Argentina, Canada, the United States, and Brazil. How
ever, similar to the case of the United States during
the nineteenth century, large numbers of foreign immi
grants entered Mexico during the colonial period. But
at no time since 1900 has the foreign population resid
ing in the country reached even 1 per cent of the Mexi
can total.-1 - -5
Composition of Population
The composition of Mexico's population has
undergone significant changes, understandably. It was
not difficult to distinguish the main components of pop
ulation during the sixteenth century. At the beginning
there were two main groups: Spanish and Indian. Soon
there was interbreeding between the two. Not long
thereafter, the Negro was introduced into the Caribbean
and the coast of the Gulf of Mexico. This racial group
remained very small in number--about 0.2 per cent of the
total population.
Later in the colonial period other types immi
grated to Mexico, Including Asiatic groups. Most of the
descendants of these people became part of that vast pop
ulation known as "mestizo." In terms of broad racial
I5j ose E. Iturriaga, La Estructura Social y
Cultura de Mexico (Mexico: Fondo de Cultura Economica.
r^r). p. 111. —
92
stock, by 1805» the distribution of population fell Into
three main classifications:1^
Classification Number Percentage
White 1,000,000 18
Mestizo 2,000,000 38
Indian 2.500.000
Total 5,500,000 100
Mr. Jose Iturriaga, a qualified Mexican scholar,
attempted to provide more representative Information
about the socio-ethnic elements of modern Mexico. He
analyzed the returns from the 19^0 national census. Mr.
Iturriaga noted two Important changes from the composi
tion of Mexico's earlier population. The mestizo is by
far the largest in number, and numerically, the Indian
is relatively unimportant:1" ' 7
Group Percentage
Indian 8
Native European 7
Mestizo 84
European 1
100
-^P. DePlores, ££. clt. . p. 78.
1 ^Iturriaga, o j d . cit. . p. 90*
93
As a group the mestizo is found in all sections
of Mexico, from the hinterlands to the large urban
centers. The mestizo is also found In all the education
al stratas. In other words, Mexico is predominantly mes
tizo. It is from this group that the main drive towards
lofty national goals and economic development stems. It
is from the mestizo group that Mexico is drawing its
entrepreneurs--the promoters and innovators for the pri
vate and public sectors.
III. SOCIO-ECONOMIC GROUPS AND REGIONS
The regions of Mexico may be divided differently
for particular purposes. For instance, in the early part
of this chapter, Mexico was presented with reference to
physical features, as well as differences in climates.
The present division is for the purpose of broader clas
sification of lands, population, and cultural factors
within each region. This classification seems more
fitting for discussion of economic development. It will
be easier and clearer to cite government and private
initiative since all of these sections differ from each
other significantly in terms of population density, agri
culture, mineral, and industrial activity.
94
In a broad sense, there are five major groups--
although It is not difficult to find a number of sub-
regions and sub-groups that do not fit neatly Into the
general scheme.^
The Metropolis
Geographically, this section has the smallest
land area, but traditionally, it has been the most im
portant In Mexico, This Is the Federal District, the
heart and nerve center of the nation: metropolitan Mex
ico City, an urban center of about five million people
forming the economic, political, and cultural capital.
As a sophisticated city, and one of the great capitals
of the world, Mexico City has played an Important role
In the development of Mexico. The urban area Is about
600 square miles, with a density of 9>020 persons per
square mile, and today still holds the position as the
main Industrial complex of Mexico. This latter condi
tion is becoming more a detriment than an advantage to
the economy. The Metropolis is situated within the
second region: Core.
The Core Area
This region surrounds the Metropolis. To some
^Cllne, ag. clt., pp. 50-57•
95
extent, It shares the major characteristics, except, of
course, the size and density. Gore Includes eleven
states closely interconnected with the Metropolis by
highways, rail, and airlines. This area contains some
of the best agricultural lands in Its mountains and pla
teaus. While Gore occupies only 17 per cent of the land
area of the nation, Its population i-s nearly *10 per cent
of the total. Politically, Core and the Metropolis to
gether hold the dominant Influence over the other re
gions of Mexico.
The North
The northern region has a unique characteristic,
as well as Important differences from other regions of
Mexico. The North covers the states of Sonora, Chihua
hua, Coahulla, Nuevo Leon, Tamaulipas, and the Peninsula
of Lower California. These states form the United
States-Mexican border. It is an area most influenced by
North American commercial and social thinking, although
In spirit, it Is traditionally "Mexican." In economic
development, the North Is the most recent area to exper
ience public and private investment, especially In cotton
wheat, and cattle raising. The principal Industrial city
is Monterey, the steel capital of Mexico. The principal
seaports are Tampico, an important petroleum center on
the Gulf Coast, and Mazatlan on the Pacific Ocean, The
North covers more than half the national territory,
about 53*^ per cent, with only 21 per cent of the na
tion's population. This vast area includes the arid and
semi-arid territory where water is more critical than
land itself. Much of the arid land is situated on the
great northern plateau, between the northern part of the
Western and Eastern Sierra mountains.
The West
This region is located in the western part of
central Mexico. It includes the four states of Colima,
Nayarlt, Zacatecas, and Jalisco. The climate is sub
tropical, similar to Core. Over the years the West has
maintained a stable and conservative middle class with
the main elements of a relatively undiluted Spanish heri
tage, and very little Indian influence.
The West occupies about 10 per cent of the na
tion's territory. It has some of the best agricultural
lands at altitudes of 1,500 to 6,000 feet. This is the
third best developed section of Mexico. In recent years
its growth has been In farming, the dairy Industry, and
a tendency toward industrialization in Guadalajara, the
regional capital of the West.
97
The South
The most Indian part of Mexico is found in the
South. This section includes the Peninsula of Yucatan
and the states of Guarrero, Oaxaca, and Chiapas on the
pacific coast— the latter forming part of the Isthmus
of Tehuantepec. The South is separated from Core by
difficult mountain barriers, described previously as the
Southern Sierra Madre.
More than half of the Indian population speaks
only its native tongue, which consists of about fifty
dialects. Traditionally, the land tenure system Is one
of small landholding Indian communities. Large planta
tions employing native labor are not unusual, however.
The South is the least developed. The central
government has allocated less social overhead capital
expenditures as compared to other areas. Its capital,
resources, communications, and state of social arts are
the least conducive to industrialization. Population
amounts to about 17 per cent of the nation, and land
area makes up 20 per cent of the territory. The natural
environment is colorful--with Indian costumes and native
markets, a factor in tourist attraction. There are two
seaports on the pacific coast: Salina Cruz on the
Isthmus, and Acapulco, the currently famed jet-set re
sort .
IV. ECONOMIC RESOURCE BASE
98
Two natural factors, a variety of climates and
of soils, make possible a widespread output of agricul
tural products In Mexico. However, at this stage of
economic development, the nation Is not self-sufficient
In all of its agricultural needs. Thus, the necessity
for greater output In the future becomes Imperative, not
only In order to improve living standards, but also to
cope with the rate of population growth. Yet, In spite
of Mexico’s needs, the agricultural economy has been able
to specialize and export some agricultural surplus--at
a sacrifice, but a welcome measure nonetheless for re
lieving the pressure of the much needed foreign exchange.
Mexico’s principal crops, In order of their im
portance, are corn, cotton, wheat, coffee, sugarcane,
beans, tomatoes, bananas, oranges, and alfalfa. During
the years of 1958/1960, the most significant exports were
cotton, rice, bananas, cacao, coffee, and raw sugar. Of
the forest products, only a small percentage from the
total output went for export. Cattle were the only ani
mals to enter the export market--about 20 per cent of the
19
nation’s stock.
^ Oxford Economic Atlas of the World, 3^*d Edition
(London: Oxford University Press, 1965). p"7 222.
99
In the mineral and metal industry, Mexico has
been a leading supplier of such products as silver, mer
cury, lead, zinc, and sulphur. Other important metals
and minerals essential to the nation’s economy are on
the whole scarce. This is true of Iron ore, steel, and
aluminum. Coal output, on the other hand, has increased
In recent years--thus in keeping with the requirements
for the steel industry and general fuel consumption.
The Agricultural Areas
The area best suited for agriculture lies mainly
in the region previously described as Core. The urban
centers nearby provide accessible markets for a greater
percentage of the products raised. In addition to deep
soil and good fertility, this region has a moderate sea
sonal rainfall not so abundant as to leach the soil.
During the rainy summers, corn appears to be the univer
sal crop. The winter brings a comparative drought. Far
mers whose fields are unirrigated must turn to plants
which require less moisture, such as wheat, barley, and
beans. Poorer lands cultivate maguey for manufacturing
20
a mild alcoholic drink called pulque.
20
George F. Deasy, et al., The World’s Nations;
An Economic and Regional Geography (New York: B"I
LIppincott Company , 19i?&). pT 31^*
This so-called "commercial heartland" includes,
in addition to agriculture, many modern manufacturing
industries replacing the older small shops and cottage
Industries. Effective demand has been the highest in
Gore and in the Metropolis over other sections of Mexico
thus allowing purchasing power from such factory-pro
duced goods as textiles, clothing, flour, beer, leather
goods, metal ware, cement, paper, dairy products, pot
tery, glass, radios, tires, automobiles, and trucks.
Core, as a center of agriculture and trade, to
gether with the Metropolis' commerce and industry, make
for another of Mexico's major commercial actlvities--the
tourist Industry. The scenery, a mild climate, good
roads and transportation service, and a cosmopolitan
atmosphere, all promote a lucrative tourist trade, as
well as a source of foreign exchange.
The region east of Core, on the gulf coast, is
often referred to as the Transit Zone.2- 1 - This is the
moist and hot coastal lowland which provides the outlet
from the Heartland to the major sea lanes through the
port of Vera Cruz. The hot and humid climate produces
such tropical products as sugar cane, cacao, bananas,
21Ibld.. p. 209
101
citrus fruit, rice, and vanilla. The higher coastal
ranges with a cooler savanna climate are ideal for grow
ing coffee. As for Internal trade, the tropical low
lands are sufficiently close for easy transportation
of tropical raw products to the industrial centers of
Gore and the Metropolis.
The section known as the "humid lands" is within
the region previously classified as the West. There is
no hard and fast division, as a portion of Core may well
be within this last classification. The humid lands,
however, are not as agriculturally advanced as Gore pro
per. Furthermore, future agricultural development of the
area will be hampered by the lack of flat lands, although
the dairy Industry and dairy crops are becoming important
to the area. Corn, wheat, beans, and tomatoes are the
major crops; while coffee and cacao are grown on the trop
ical and subtropical mountain slopes. In recent times
there have been efforts to promote cattle raising in the
open woodlands for local needs.
The major fiber plantation belt lies in the
northern part of the Yucatan Peninsula, close to the trop
ical forest which supplies Mexico with hardwood. The
fiber belt produces henequen valuable for making twine
and rope, and, this region is relatively close to one of
102
the world’s leading twine markets— the United States.
The Drylands; Their Agriculture
and Minerals
The parched and semi-arid lands of the North
have been undergoing economic stimulus, particularly in
agriculture. Irrigation has made for a variety of crops,
including cotton, wheat, figs, dates, alfalfa, and cit
rus fruit. The range is suitable enough to provide food
forage for animals; thus, cattle raising has been an in
dustry of long standing.
The North is still Mexico’s most important min
eral producing domain. The most productive public and
private steel mills are located in the City of Monterey,
known as "the Pittsburg" of Mexico. Important coal depos
its are found in the State of Coahuila, as well as iron
ore in the adjacent areas. On the gulf coast nature is
generous in the oil-rich producing areas in the vicinity
of the port of Tampico. Too, the natural gas trade has
been developed to a substantial level.
Since the northern region is one of the more
sparsely populated areas of Mexico, it should hold much
promise for considerable growth when Mexico Is able to
afford more social overhead capital expenditures on irri
gation, land reclamation, and education. At present, a
103
substantial amount of North American private capital is
invested in large-scale commercial cotton and cattle
raising. There are differences of opinion, however, over
such large commercial undertakings by North American
entrepreneurs. Hardly anyone will disagree as to its
economic desirability, but some Mexican nationals feel
that more Mexican capital should share in the development
of the area, particularly if the government extended the
necessary, credit.
The Scarcity of Resources
There are many resources Mexico finds wanting at
this stage of economic growth. Consequently, a portion
of its foreign exchange has to be allocated, on a selec
tive basis, for the imports essential to the economy. To
be sure, Mexican economists do not disregard the economic
proprieties nor the benefits accrued from specialization.
It is true, however, that economic development of under
developed areas suggests a fair degree of economic nation
alism. One is well aware that the Mexican government
uses its power in the field of foreign trade with vigor
22
and flexibility. Moreover, there are some economists
Tiaymond Vernon, The Dilemma of Mexico’s Develop-
ment (Cambridge, Massachusetts: Harvard University Press.
1W 5 ) , P. 2*1-.
104'
who believe that at this stage of growth Mexico must pay
a higher price in real terms for many imports, since her
productivity has not reached a level which makes for bet
ter terms of trade.
Thus, at present, Mexico finds herself with spor
adic import surpluses, and it is not surprising that in
dustrial goods account for a large share of foreign pur
chases. These include chemicals, aluminum, iron and
steel, machinery, electrical equipment, and road vehicles.
Moreover, there has been no significant change in the
above distribution of imports during the last few years.
Quantitatively, imports of food and beverages have de
creased, as domestic production has been sufficient to
meet domestic needs.
The Economic Resource Base
Mexico's present economic base of human and nat
ural resources hold good promise for future economic de
velopment. The nation has advanced in both the agricul
tural and industrial fronts since 19^0. Emphasis on land
development has been towards larger landholding rather
than small ones as seen in the earlier e. 1 ido movement.
It is also notable that agriculture has not declined in
relative importance during the last two decades as in the
case of Columbia, Argentina, and Brazil. The Mexican pub-
105
lie sector has allocated annual budget expenditures for
irrigation, machinery, and fertilizer. Thus, the econo
mic base has been expanding through the economic efforts
of government in the form of social overhead capital ex
penditures and public credit. This process is described
more fully in Chapters VI and VII.
In recent years, the North, the states of Sonora,
Chihuahua, Cachiula, and Nuevo Leon, have received con
siderable stimulus from government aid in the form of
social overhead capital expenditures Including highway
extensions. Irrigation, and electric power development.
Commensurate with the expansion of the economic base, pri
vate capital from North America has invested in larger
wheat, cotton, cattle, and mining development. The en
largement of the economic base for industrial growth has
also been one of the key features of the North. Coal,
iron ore, steel production, and electrical generating
capacity and output have trebled from 19^0 to 195^» And
in the northeast, gasoline production rose to an Index
of 351• The West shares the same expansion of economic
base, and close parallels can be drawn with the North on
capital growth. The former, however, exceeds the latter
in manufacturing and trade. Government economic cooper
ation with budget expenditures and public credit have
106
been significant and extensive in Core as well as in the
West.
The North has received impressive assistance in
the form of social overhead capital as mentioned above.
These public expenditures have been effective for several
reasons; most of them will be discussed in Chapters VIII
and IX. At this juncture it can be said that the North
is sparsely populated, and land improvement and opera
tions are under modern methods of organization and tech
nology. Entrepreneural resource is being developed at a
fast pace. The steel area of Monterey, for example, has
excellent academic and technical schools. Perhaps, too,
the population tends more easily towards social change
due, in part, to the closeness of United States frontier.
Core, the area of Mexico City, the hub of manu
facturing and trade, the main source of industrial know
ledge, the seat of decision-making for both the public
and private sectors, reflects the overall resource base
of the country. The growth of this area during the last
quarter of a century has been outstanding, and meteoric
when compared to other regions of Mexico. Thus, Core is
an example of Mexicofs resource and human base and its
future potential. This is not to deny that the growth is
not devoid of cycles of economic stagnation— even the best
107
laid plans and arrangements cannot always escape errors
of judgements or unforseen events. This tjrpe of economic
calamity Is more apparent in an economy that has reached
well-sustained growth.
The other regions of Mexico have most of the
natural economic base necessary for economic growth. In
the more remote regions, such as the South, economic de
velopment and social change are still rather pale. Its
economic base labors under greater difficulties due to
her mountainous terrain and tropical heat in the low
lands .
Economic growth, particularly during the early
stages, tends to promote a larger population which in
turn makes greater demands for more social capital:
education, technological training, and the need for more
resources as well. The competition between material re
sources and population pressures strongly suggests con
trol in the rate of population growth— particularly dur
ing the transitional stages of early growth. Mexico
has not shown efforts towards a national "Neo-Malthusian”
policy in view of her rather high (3 per cent) birth rate
in the last decade. Demographers are not at all opti
mistic about the future ratio of population growth to
resource development.
108
It Is not at all clear that Everett Hagan's "The
Common Sense of Population" is applicable to the case of
Mexico during the last two decades. Whether the lower
middle class and the middle class were conscious of "the
standard of living effect," it is difficult to define.
As indicated above, Mexico's birth rate has been 3 per
cent, while the average Increase per capita gross pro
duct for 19^5/1955 reached 3*5 per cent.2^ Thus, It is
reasonable to assume that Mexico's resource base has been
quite adequate, and that real development has been a fact.
Consequently, the future holds a promise for greater
growth.
23
^United Nations, The Economic Development of
Latin America In the Post-War Period (E/CN.12/659/Rev. 1,
1964) (New York), p. 113-
CHAPTER IV
A BRIEF HISTORY OF MEXICO AND THE
EARLY ECONOMIC EVOLUTION OF
THE GOVERNMENT
"Anyone who attempts to understand con
temporary Mexico without much reference to its
history courts major risks. This is certainly
true of any effort to understand relations be
tween the public and the private sectors in
Mexico."
Raymond Vernon, Public Policy
and Private Enterprise in Mexico
(Cambridge, Massachusetts: Harvard
University Press, 196*0, p. 2.
Chapters V and VI provide a short survey of the
main Institutions and political tides that have swept over
Mexico, from the Conquest to the Revolution of 1910. The
main body of this chapter covers an early account of the
social and political conditions during the colonial period,
as well as a brief description of the general events that
led to the war of independence. The historical events cov
ering the years between 1857 and 1910 were the embryonic
stages of development of the economic role of modern govern-
110
ment. The Juarez reforms were Instrumental In the
"Revolutionary Credo" of modern Mexico; the growth of
social overhead capital during the Diaz dictatorship
served as an early projectile to contemporary industrial
growth in Mexico.
The purpose of this chapter is to correlate the
institutions and traditions of the colonial times with
their influences, which shaped the social thinking and
attitudes of subsequent eras. The manner of living, the
Ideals, the theology, and the mores of the last three
hundred years have created men and leaders In Mexico who
became social and economic forces for both social good
and social evil.
The present type of Mexican government is the
result, in part, of the social and political struggles
of the past toward a social identity, a sense of direc
tion, and of course, social goals. Thus, the present
role of government in the Mexican economy stems from
the conditions and moving events of the past.
I. THE INVASION
In August 1519t a- company of Spanish adventurers
and explorers came to Mexico in search of the golden halls
of Montezuma. Their objectives were simple and direct:
Ill
To relieve the Aztec nation of her golden riches for the
glory of Spain and for personal plunder, and to chris
tianize the heathen Indians. Hernando Cortes, the leader
of this band of self-appointed conquerors, had heard the
fabulous tales of the grandeur of Tenochtitlan— the
Mexico City of today.
The conquest was accomplished by resourceful
ness and a set of unique circumstances. The legend of
Quetzacoatl (the white god who haunted the Aztecs into
mystic feudalism and superstition), the canons and horses
brought by the Spaniards, the deep resentment of the
Indian tribes subjugated by the Aztecs, and the guile and
tenacity of Cortes, all aided in a quick and complete
conquest--thus establishing a Spanish empire in the new
world.
At the time of the conquest, the Spanish govern
ment was ill-equipped to administer the social and ma
terial needs of a vanquished people. The Aztec nation
had a relatively advanced society, comparable to early
Egypt. With the destruction of their Institutions and
resources, the Spaniards offered Christianity and sub
jugation— both with the sword. In comparison to the
English expansion, the Spanish mission to the new world
differed In several ways. Originally, the Spaniards
112
sought new trade routes to the East Indies. The Spanish
crown and the explorers were after trade development and
riches. The New England colonies were a disenchanted
people with the religious and political climate of
England. As they sailed west across the Atlantic, their
backs were to England and they proposed never to return.
They sought to carve a new life for themselves. The
Spaniards, on the other hand, set out to find riches
and return to Spain— the core of their spiritual and
social environment.
Once the conquest was completed, the conquerors
dedicated themselves to the exploitation of the wealth
of Mexico. Finding gold and returning to Spain and a
life of luxury was the simple-minded goal of the Spaniards
following the Invasion. A few decades later, the ex
ploitation of the new world products for trade with the
continent became a lucrative enterprise. The attitudes
between Spain and the new world remained the same. Every
Spanish haolendado (Landowner), whether nobleman or
peasant, dreamed of returning one day to his Mecca, Spain,
to spend his remaining years in comfort. Meanwhile, the
Spanish haciendado had no intention of exerting personal
effort on the land. It would be beneath his status to
do so. The Spanish patron placed overseers in charge of
113
the Indians who worked the mines, as well as the vast
landholdings that produced the crops and raw materials
destined for Spain.
II. THE COLONIAL GOVERNMENT AND
THE HACIENDADOS
The Mexico of today was part of a larger area
known as New Spain during colonial times. Not long after
the conquest, Spain set out to colonize the new world for
the benefit of the mother country. Trade with the colon
ies was closely controlled by the colonial administra
tors who carried out directives from the crown. On the
whole, the attitude of the crown towards the Indian, the
most exploitative resource, was benevolent and protective.
Not infrequently, the colonial administrators were
obliged to overlook violations of the law by landowners
against the interest of the Indians. It is generally
agreed, however, that Spain's colonial rule was a reason
able one. On the other hand, the administrators in
Mexico and the elite did not always act in the interest
of Spain. Ultimately, loss of her colonies stemmed not
only from the tempo of the times, but from Spain's inner
social decay as well.
114
The Colonial Administration
New Spain was governed under a system of Viceroys
and Captaincies. Historians tell us of the mediocrity
of some of these officials who were often inflexible in
carrying out the orders of a narrow-minded despot. On
the other hand, there have been Viceroys who deserve
better recommendations. Many of these administrators
were good public servants trained in their profession
and who also had a high degree of personal responsibility.
A good Viceroy had to exercise wide discretionary powers.
His office was months away from the Council of the Indies
(the legislative and Judicial body governing the Spanish
possessions)When sudden emergencies arose, it was ex
pected that a Viceroy act with the necessary discretion.
One important factor in the evolution of inde
pendent government in Mexico lies in the colonial caste
system. It has been noted that Viceroys and administra
tors were recruited strictly from the mother country.
No official of the crown could hold an important office
in New Spain unless he was born in Spain. This applied
to the hierarchy of the church as well. It was not until
the latter part of the colonial period that the Crlollos.
^Lesley Byrd Simpson, Many Mexlcos (Berkeley and
Los Angeles; University of California Press, 1966), pp.
41-48.
115
people of Spanish parents b o m In the colonies, were
allowed to hold minor offices.
The colonial caste system had its telling effects
on government administration after Independence. It
deprived generations of colonials of experience in civil
administration, as well as In the principles and maturity
in self-government. The schism between the Spaniard and
the American native was a source of social conflict at
the latter part of the colonial period. In fact, one of
the underlying forces of the Independent movement was the
bid for power by the Criollos against the Spanish-born.
Below the Criollos lie the great number of
mestizos. those with Spanish (or European) and Indian
blood. Their position on the social and economic ladder
was one slightly above the Indian. Many of the mestizos
were energetic and Industrious, but since their oppor
tunity for self-improvement was meager, they had to seek
occupations for which the Criollos had little stomach.
It was not until after the war of independence that the
Mestizo came Into his own.
As for the vast population of Indians, they sup
ported the whole colonial economic structure with their
endless toil. In many Instances, the Indians' economic
position was no better than that of a slave. This appears
116
to be true in spite of the Laws of the Indies of 15^2,
and subsequent regulations from the Spanish Crown pro-
2
tecting and defining the Indians' legal status. Prior
to the rise of Benito Juarez, the Indian was not ex
pected to ever emerge above his lowly social state.
The disunity of the classes mentioned above made
for their rather easy and continued domination by a small
but aggressive Spanish minority. This disunity had severe
effects on the young republic during the years of search
for a constructive and stable government. As it will be
seen later In this study, the diversity of Interests was
quite strong. The aggressive actions of the small white
minority, and later, the ambitious bid for power by the
mestizos, were not necessarily in the Interest of that
vast number of -uneducated and lowly Indian peasants.
The Hacienda System
The large estates served the social and economic
needs of the colonial' system In several ways. For one
thing, the large estate, or Latlfundla. was not a foreign
Institution to the Spaniards. The system was Introduced
to Spain by the Romans. Later, the Visigoths wove lati-
2
Donald E. Worcester and Wendell G. Shaeffer, The
Growth and Culture of Latin America (New York: Oxford
University Press, 1956), p._l6B.
117
fundia into their social and economic fabric. The power
of the Visigoths rested upon their ability to fight and
upon their possession of land. They became a military,
landed nobility.
The Hacienda system of New Spain logically fol
lowed the traditions of the mother country, and, of
course, maintained the caste system. The large estates
were owned by the "Gachupines" (of Spanish descent) and
the Criollos. The Gachupine, however, considered him
self "superior" to men of aristocratic Spanish blood
h .
born in Spain. This traditional attitude had an effect
upon the psychology and social habits of the whites of
New Spain, and, after independence, upon those who as
pired to the same privileges.
Spain, of course, furnished the format for such
values. To New Spain, the "noble state" rested on two
broad ideas: The right to bear arms, and the right to
hold land. And, in particular, the more land, the more
nobility. Indeed, such values became a detriment to
3
^Simpson, o j d . cit.. p. 253*
if
Patricia Faith DeFlores, "Mexican Costume: Its
Development from Pre-Colombian Times to the Present as
an Expression of the Blending Cultures." Unpublished
Master's Thesis, Stanford University, Palo Alto, 19^9,
p. ?>*.
118
economic development during nineteenth century Mexico—
although this problem Is not foreign to underdeveloped
areas other than Hispanic America. Even during the
colonial period, the economy was deprived of the full
effects of the true entrepreneural spirit. The lure of
class and "personal worth" discouraged many merchants
from plying their skills, miners from exploiting the
mines, and manufacturers from production and encouraged
them to become landed gentry and "noble haclendados."^
The social attitudes mentioned above laid the
foundation, therefore, for a rigid institution that
clashed severely with nineteenth century liberalism in
the quest for national unity and social growth. Natur
ally, large estates were an obstacle to economic develop
ment. And it follows that the haciendados, together
with the church hierarchy, were the greatest opponents
to any movement and social ideas that endangered the
status quo of their times.
In conclusion, the latifundia, or hacienda system,
In colonial Latin America was a simple process, without
any serious obstacles to Its own development. The ec
onomic conditions were conducive to It; the land was
cheap and abundant, and there was a more or less servile
%Impson, o£. clt., p. 252.
119
laboring class. Spain and Europe were ready markets
for the mass agricultural products. In fact, one can
compare these economic conditions with the cotton em
pire of the Old South in the United States, with the
one obvious exception. In the old South, slavery was
legal.^
As for the Indians under the hacienda system,
their lot continued to be that of exploitable wards of
the Crown. Prior to independence, the Indian popu
lation, as noted in Chapter III, was about one-half of
the total population of Mexico. Their vast numbers
served as the labor supply for every part of the colonial
economy. Some of the so-called free Indians lived as
small farmers, or as artisans in the cities. But, the
majority of them worked the mines, the farms, and the
7
large plantations under latifundla.
The Encomienda System. This system began during
the early colonial period and flourished even before the
Franciscan Fathers arrived, who later opposed it. The
Encomender-plantation owner or miner was to assume the
obligation of a lay missionary, while at the same time
6Ibid., p. 103-
7
'Worcester and Schaeffer, oj>. cdt,, p. 168.
1 2 0
acting as a collector of tribute and. general overlord of
the Indians. In other words, the encomienda was a kind
of trusteeship, but in reality it was nothing more than
a quasl-feudal arrangement. The encomendero accepted
the responsibility for the Indian’s soul in the here
after— while the Indian paid for the privilege by working
O
the plantations or washing gold in lieu of cash tribute.
There were many grave abuses. It is noteworthy that the
encomienda of the early colonies was a type of carry
back tax which fell heavily on the Indians. In turn the
Spanish government extracted a tax from the encomenderos.
The encomienda system proved quite unsatisfactory,
but, notwithstanding the Inhuman aspects and manifest
hypocrlcy, the encomienda was a step towards establishing
a stable and producing economy during early colonial days.
But the colonial economy was under heavy pressure to pro
duce more food and raw products demanded by the Spanish
government. Subsequent new laws were decreed for the pro
tection of the Indians, defining them as "free subjects of
the king," but the Spanish landowners defined them as lazy,
irresponsible, and drunken vagabonds.
g
Simpson, op. clt., p. 108.
121
Recognizing that necessary work had to be done,
the Spanish government proposed the substitution of Negro
slaves and Indian free labor. The colonials objected be
cause, they said, Negro slaves were too expensive, as an
alternative to the old encomienda system. And besides,
while technically the New Laws made the Indian free, he
was not oriented to the white man's culture. That is, he
had no tradition or interest in working for wages (es
pecially when wages were so meager). In other words,
Q
the Indian had no concept of the market process.
The Repartamlento. This system was instituted by
the Spanish government as a measure for maintaining sta
bility and growth in the colonial economy. The system
was a means for coercing "free" Indians into working for
wages without sacrificing their natural rights.But
wage determinations by the colonials may have been beside
the point. In an economic sense, real wages were prob
ably difficult to determine due to the "cobweb" effect
of price, demand, supply behavior, and of basic commodities
such as corn. However, the haciendados protected them
selves against such market uncertainties by paying the
^1 bid.. p. 10*+.
■^Worcester and Schaeffer, 0£. clt., p. 101.
122
Indians one Real per day for agricultural work; while
mine owners paid twice that modest sum for mine workers.
It was fortunate that the Indians did not depend entirely
on wages for subsistence. Their meager money wages made
it necessary that they raise their own foodstuff. Yet,
with some irony, it is curious to note that some his
torians considered the colonial Indians generally better
off then the European peasantry of the same era.1’ ' '
The repartamiento was there to stay. The system
alloted a certain number of Indians to any enterprise.
The authority for allocating labor in this manner was
based on the principle that government might force its
citizens to do such work as was necessary in order to
maintain a productive economy. Necessary work was de
fined as agriculture, mining, the erection of public
buildings, churches, convents, the opening and mainten
ance of roads, harbors, and irrigation ditches. The
repartamiento, in other words, was a system which served
both the public and private sectors of the day, but not
without a moral quandry. The government felt that such
a coercive practice was an evil, but sometimes a neces
sary evil. It was a stop-gap system to fill the transi-
1IIbld.. p. 102
123
tion, to serve as an educational Interlude until the
Indian came Into his own, until he learned to work for
wages like a civilized human being. One need not delve
too deeply into history to learn how short of their
goals these aims fell. The repartamiento endured, how
ever, for two and one-half centuries and principally in
agriculture, the main segment of the economy. And even
after Independence, coercion was continued under the
cheaper and yet more poorly regulated system called debt
12
peonage.
The Church in the Colonial Period
To students of modern economic development, the
history of the Roman Catholic Church holds particular
slgnificance. The reasons, of course, are not only re
ligious, but also social, political, and economic. A
person is not likely to study the economic and political
history of Mexico, its social turmoil, the political con
flicts among group interests, the insurrections, the
bloody revolutions and counter-revolutions, without find
ing the church involved in the midst of the firry, or
drawn into most of the conflicts.
12
Simpson, 0£. clt.. p. 115.
12*J-
From the days of the conquistadores to the Con
stitution of 1857. the Roman Catholic Church was the
State religion. The Crown and the Church were the two
powerful social and economic forces for approximately
three hundred and fifty years. The Church was also a
part of the ruling classes of the colonial period. The
military and the landowners held common interest with
the clerics. In turn, the Church, through the pulpit,
exerted powerful influence not only over the elite, but
also over the vast number of uneducated and impoverished
Indian population. It is not possible to overlook the
economic importance of the fact that at the time of in
dependence (1821), the property of the Catholic Church
consisted of one-half of the total value of all produc
tive real estate in Mexico, according to the conservative
13
Lucas Alerman.
The powerful economic position of the Church was
maintained and strengthened through the special priv
ileges it enjoyed. For centuries, throughout the colonial
period and up to 1857, the Church was exempted from tax
ation and exercised the privilege of lending money on
13
^Frank Brandenburg, The Making of Modern Mexico
(Englewood Cliffs, New Jersey: Prentice-Hall, Inc.,
1 9 6^), p. 188.
125
mortgages; also the priests were allowed to be heirs or
legatees, and, the Church itself held a special judicial
14
status. All these far-reaching political and economic
advantages were in addition to the tithes paid by the lay
population for the support of the Church, There was a
time during the colonial period when the number of re
ligious houses increased, and the landholding expanded
to such large proportions, that the concentration of
wealth constituted a financial burden to the colonial
economy.For one thing, a part of the colonial earn
ings was continually siphoned from the Income stream into
the Church*s treasury.
It is not certain what portion of the Church*s
savings returned to the economy as investment expendi
tures. Nor is it known specifically what part of these
expenditures were productive. It is true the Church
made loans to the landowners, business groups, and even
the colonial government (and to the Mexican government
after Independence), but the extent and productiveness
of these outlays escape the accuracy of statistics. Un
doubtedly, some loans were productive as growth capital.
lZfIbld.. p. 189.
1^Worcester and Schaeffer, 0£. clt., p. 170.
1 2 6
But, on the other hand, the Church made extensive out
lays for a large number of churches, convents, and other
church properties that were of doubtful nature in rela
tion to the economic growth of the colonies.
ings retarded economic growth in the modern sense. The
Church held much of the productive capital in the form
of vast land holdings, some of which worked for the
Church's own interest, but the private sector was denied
a fuller national Impetus toward over-all growth. Dr.
Frank Brandenburg asserts that the story of economic
development of modern Mexico has as much to do with the
story of confiscating church properties as of attracting
1 £
and controlling foreign capital.
during the colonial period in New Spain. In the six
teenth century, the Franciscans were the early church
pioneers in the evangelization of the natives. These re
ligious men were humane— ready to make use of any prac
tical method at hand to meet the daily needs of the
Indians. Their mild rule and their abundant good will,
their tireless personal intervention for the protection
History supports the contention that church hold-
The Church attitudes toward the Indians varied
127
of their charges— these factors did more to win the
affection and veneration of the Indians than any amount
17
of orthodox theology could have done. r
There were other orders whose benevolent work
with the Indians also helped to break the ground for
colonial development. The Dominicans and the Jesuits
established many missions throughout New Spain. These
mendicant orders lived under their own rules and owed
obedience only to their superiors in Rome. But in the
latter colonial period, the secular priests, as noted
in this chapter, became the powerful force behind the
colonial church.
The missionary zeal of the early friars gave way
to Catholic institutionalism, and the whims of the
Spanish government. The Church and the state "reflected
1 B
the indissoluble union of the altar and the throne."
It Is no small wonder that the Spanish haciendados
complained bitterly against the early mendicant orders.
A large amount of Indian labor and raw materials were
used for building convents, chapels, and church hold
ings— thus, keeping a considerable amount of resources
17
'Simpson, op. clt., p. 68.
18 ~
Brandenburg, op. clt.. p. 2^.
128
out of commercial circulation, or from the income stream.
This latter view is held because the Indians were not al
ways paid wages, and much of the Indian labor in the
Hispanic Americas was donated. The haciendados, it should
be noted, did not quarrel with the friars over Indians'
wages. They merely felt that too large an amount of re
sources was being sacrificed for Church development, in
stead of contributing to the profitability of commercial
19
crops and the mines. 7 However, the same thing, and with
greater grandiose, could be said of the secular church
20
at the end of the colonial period.
Historically, the above appears to be the case.
In other words, the colonial economy was deprived of a
larger share of resource utilization for the market in
several ways. First, large amounts of labor and re
sources were diverted to the development of church prop
erties. Second, the large landholding of the church de
tracted from additional output for the economy. Third,
the tithe system, which subtracted savings from the in
come stream, did not return savings altogether to the
circular flow in the form of productive enterprises.
19
Simpson, Oja. clt.. pp. 70-71-
20
Brandenburg, loo. clt.
129
(The writer of this study is not unmindful, however,
that during the height of the colonial period some of
the Church landholdings were engaged in commercial pro
duction) .
The foregoing discussion on the role of the
Church during the colonial period marks, among other
parts the economic heritage of the young Mexican nation
after Independence. The revolutions that followed re
vealed that traditional powers of Mexico were too rigid
to cope with the rising Anglo-Saxon liberal ideas and
the individualism that swept through Europe during the
nineteenth century. It is not possible to overlook these
circumstances, which in themselves, demanded the sweep
ing away of all economic mores, but not without bloodshed
and material waste, as history bears out. These struggles
marked the quest for Identity and national unity so
necessary for the social and economic development that
emerged during the early part of the twentieth century.
Mercantilism as a Background to
Development
Mercantilism, some writers tell us, flowered best
in the Spanish environment of the fifteenth and sixteenth
? 1
centuries. The administration, the legal structure,
^Edmund Whittaker, Schools and Streams of Economic
Thought (Chicago: Hand McNally Co., 19^0), p . 53•
130
and military arrangements appeared to have been well-
knit. All this secured greater assurance in view of
all the material written about Spain's political and
economic control of her colonies. It would seem that
Spain was assured success as a leading imperialistic
power in Europe. This was not the case, however, be
cause her failure lies partly in her traditions, her
institutions, and the social environment which prevented
her from making the most of her golden opportunities.
For Instance, Spain had an ideal economic en
vironment: the abundant resources and cheap labor
from the colonies, the flow of precious metals, all of
which would have and should have enhanced the material
wealth of the kingdom. Yet Spain failed to materialize
the growth and footing essential to Industrialization
when compared with France, and particularly England,
during the same period. The persistent flow of gold
and silver into Spain did not always render the usual
stimulus of domestic production and trade In view of
the abundant resources from the colonies. Instead,
gold had a perverse effect. Spain's Industries and
trade did not develop to the extent which her potential
allowed. The true entrepreneurial spirit seemed wanting,
and later, a dearth during Mexico's early development.
131
It was considered indelicate by the privileged class to
engage in industry and trade (to the extent necessary
for significant growth). The same attitudes and feel
ings, although less intense, had existed during the
early growth period of England and France, But history
witnessed the fact that a middle class, the bourgeoisie,
emerged in those countries and took up the banner of in
dustry and trade. This class of entrepreneurs eventu
ally became the social and political power in their
respective countries.
It Is not surprising, therefore, that the litera
ture In the field of mercantilism flowed overwhelmingly
from the pens of English and French economists. On the
other hand, the lack of fuller economic fulfillment by
Spain has been questioned and discussed by many social
writers. Of equal significance and Importance to this
study might be the social effects on the colonies— for
Spain1s psychological attitudes were reflected In the
attitudes of young Mexico during the first three-quarters
of the nineteenth century. During this period, Mexico,
as a young nation, was t o m by conflicting interests.
Her government lacked definition as an Institution rep
resenting general public well-being. Consequently, public
economic goals per se were generally nil. The trans
132
planted Spanish values lend themselves to the unique
social and economic traditions of the colonies, for
example, cheap Indian labor fitted well into the social
schemes of the new nation.
Why did England emerge from a not particularly
advanced country to the site of the Industrial Revolu
tion, while Spain, which also practiced mercantilism,
lagged behind? This question has been answered rather
convincingly by contemporary economists. In a broad
sense, Spain's problem was monetary, as well as tech
nological— or rather the lack of application the latter.
England was fortunate, but she also promoted her
own opportunities. Her development lies in a Juxta
position of technical knowledge, resources, and institu
tional arrangements, such as the moral acceptance of in
terest taking. During the early stages of mercantilism,
England held small quantities of gold. Spain, on the
other hand, acquired great quantities of the precious
metal from Mexico and Peru. The increased supply of
gold resulted in a substantial rise in prices not only
in Spain, but also in France and the low countries to
22
which it spread.
22w endell C. Gordon, International Trade. Goods.
People, and Ideas (New York: Alfred A. Knopf, 1958),
P. 49.
133
Gold, however, spread with appreciable lag to
England, so that there was a considerable interval dur
ing which prices had risen farther and faster on the
continent, and more so in Spain than in England, In
other words, the continent was high-priced, while
England was low-priced. Hence, England was the more
23
attractive place in which to buy. In 1569* Jean Bodin
ascribed the rise in prices not only to the practice of
monopolies, but to the abundance of gold and silver—
1 1 the principal reason which raises the price of every
thing." This is the first clear statement of a quantity
24
theory of money.
Professor Wendell Gordon believes that some of
the Impetus which the English industry received during
the sixteenth and seventeenth centuries was a result of
England's lack of gold. That is, the obtaining of gold
and silver does not automatically cause industrialization
as amply attested by the history of Spain.23 The rela
tionship of money flows, and pricey goes, surprisingly,
far into the past. In l64l, Lewes Roberts pointed out
23Ibid., p. 50.
24
Eric Roll, A History of Economic Thought (New
Yorks Prentice Hall, Inc., 1947), p. 55.
2*5
^Gordon, loc. clt.
13*+
that a country grows by engaging actively in production
(and trade) and not by simply acquiring gold. Spain had
gold, but England lacked the yellow 1 1 blessings;" yet,
as Roberts pointed out, England was progressing while
2 6
Spain (and Mexico) was stagnating.
Spain depended upon England, France, and Holland
for the goods sent to the colonies in trade. Her higher
prices were quickly transmitted to New Spain. Only the
wealthy classes were served by this trade. It is not
surprising, therefore, that in spite of Spain's mercan
tile restrictions, New Spain began to develop some in
dustries of her own.2' * This was particularly true to
ward the end of the colonial period. Moreover, New
Spain held the advantage, since the colonies were the
producers of raw materials, such as cotton, wool, hides,
and majuey fiber, et cetera.
By the end of the eighteenth century, the Bourbon
monarchs found it necessary to attempt a new enlightened
mercantile policy by opening colonial trade to other
parts of the world, and by lifting many onerous regula
tions and taxes. But the change came too late. On the
26Ibid., p. 133.
27
'Worcester and Schaeffer, ojd. clt., p. 312.
135
whole# the basic commercial psychology, values, and
practices were too fixed in New Spain to undergo any
significant transformation at this time; laissez-faire
economics simply never had a chance.
On the eve of the revolution of independence,
as expected, Mexico was strapped by a struggle of con
flicting interests. The gachupines were in control of
the colonial government and of all important administra
tive posts. The Creoles were powerful landowners chafing
under the dominance of the Spanish government. The
Church held strong political and economic power--generally
making alliances with the most conservative groups. The
Creoles asserted supremacy over the vast population of
Indians and Mestizos.
The economy was organized on two different con
cepts: feudalism of long standing, and young capital
ism with an anemic market system. In the political arena
there were two major political groups, the conservatives
and the liberals, who split over specific Issues of mon
archy versus republicanism, centralism versus federalism,
p D
and a state church versus freedom of religion. In a
sense, a cloud of political enigma hung over young
28
Brandenburg, op. clt.. p. 31*
136
Mexico— a young country t o m by small, but powerful con
flicting interests, and a vast impoverished population;
moreover, e. young nation with no experience, as well as
little knowledge of self-government.
III. THE MEXICAN INDEPENDENCE
The history of the war of Mexican Independence
suggests that no single cause or event was responsible
for the armed struggle which led to Independence. The
movement was as complicated as chaos. The confllcting
Interests within Mexico were many. But on the whole, the
spirit of insurrection did not include any changes in
the social and economic order of the Spanish regime.
Spain's defeat at the hands of Napoleon left the
Spanish empire in the hands of the Viceroys and Spanish
administrators. For the first time, the Creoles found
themselves in a political position to bid for power.
However, the new French slogan of "Liberty, Equality,
and Fraternity" had no appeal to the privileged classes
of Mexico. In fact, the Creole leaders for the most
part took the view that if Napoleon were to occupy Spain,
the American colonies must seek independence, and per
haps, with Fernando VII as a ruling monarch in America.2^
2^Worcester and Schaeffer, 0£. clt., p. ^4-15.
13 7
The political currents of the day Included other
groups. By 1810, the Spanish colonies had produced a
generation of able intellectuals who were caught up in
a whirlpool of social and intellectual political ration
alism that swept both Europe and North America. These
colonial thinkers were fired by the flaming examples of
the American and French revolutions. Moreover, the
liberals were spurred on to greater agitation for in
dependence of the American colonies and the new French
Republican Government.
But the strongest political breeze of the times
did not Include a liberal change in the social and ec
onomic structure of the future Mexican Nation— a con
dition already mentioned. While the Creoles wanted to
wrestle the political power held by the gachupines, both
of these privileged groups would, however, form alliances
and effectively destroy any "liberal uprisings."
The intellectuals remained virtually ineffective
during this period. The grievances held by the Creoles
against Spain did not, of course, fall into the same
mold as that of the intellectuals. The latter were con
cerned with lofty ideals for the new Mexican nation. But
their goals and their concepts of government and its role
in social betterment were rather nebulous.
138
Father Miguel Hidalgo
The earliest cry for independence, as recognized
by Modem Mexico, was the grass roots movement spurred
on by Miguel Hidalgo, a Creole catholic priest, known
today as the father of the Mexican Independence. On
September 16, 1810, Padre Hidalgo raised the Grlto de
Dolores. His original force of a few Indians swelled
to a vast army of thousands, spreading terror and rapine
as they made their way to Mexico City. Whites, both
Creoles and Spanish, linked arms to destroy this primi
tive caste war. Father Hidalgo was defeated and executed.
Foreign historians feel Father Hidalgo's efforts,
per se, were more destructive than constructive. He was
no social architect. His revolt did not Include plans
for construction of a social and economic nature. Many
agree, however, that Father Hidalgo was a symbol of the
hatred and frustrations of the exploited Indians and the
lower classes. In this sense, he reflected the vast
3 0
underlying social and economic conditions of the times.J
^^Howard F. Cline, The United States and Mexico
(Cambridge, Massachusetts: Harvard University Press,
1964), p. 38.
139
Father Jose Marla Morelos: Architect
of Modem Government
In the wake of Father Hidalgo*s defeat, a star
In the revolutionary drama rose to greater heights.
Jose Maria Morelos, a Mestizo Catholic priest, took up
the struggle, not only for independence from Spain, but
for social economic reforms as well. His foresight and
knowledge of social needs of the times were remarkable.
He sowed the seeds of modern Mexican revolution, and
gave courage to the cry of "Mexico for the Mexicanl"
His area of revolutionary operations now comprises the
State of Guerro— the southern part of Mexico along the
Pacific coast.
Father Morelos' revolutionary war and program
differed vastly from Father Hidalgo's insurrection. The
former was well conceived and orderly, embracing popular
sovereignty, the election of officials, the calling for
the end of special castes and privileges, and the break-
31
Ing up of large landed estates. It is noteworthy that
in the area Father Morelos occupied, his organization
succeeded in enforcing order and in maintaining a sem
blance of an administrative organization. And he col
■^‘ LWorcester and Schaeffer, ojd. clt., p. ^87.
140
lected taxes I Moreover, a program of land reform was
projected. Under Morelos* guidance the first Mexican
constitution was drawn up in 1814. It was for the times
a liberal republican document worthy of the efforts of
32
an able governmental theorist.
For five years Morelos led a small and well-
disciplined force in a series of engagements. He was
never strong enough to win a decisive victory. The
royalist forces eventually captured him. Morelos was
unfrocked, condemned to death, and executed on December
22, 1815- Dr. Leslie Simpson wrote: "The true great
ness of Morelos lies in this: in spite of his power as
head of a military establishment, he rejected every
title but that of * servant of his country1, and sub
ordinated himself to the civil authority which he had
33
created . . . ." ^
The Mexican Independence
The Independence of Mexico came about In a rather
surprising way. After Napoleon's defeat in 1814,
Ferdinand VII returned to the throne with the most con
servative elements of Spain. He Jailed the liberals and
refuted the Spanish Constitution of 1812. A coup d * etat
~^Ibld., p. 488.
33
-^Simpson, ojd. clt.. p. 213.
1*4-1
in 1820 changed Ferdinand*s attitude towards the new
constitution, however. The new Cortes and Ministry were
highly liberal, anti-clerical, and determined to reduce
the King to a figurehead. When news reached Mexico
that liberals had triumphed in Spain, there was a re
markable change of heart. Those who in 1810 abhorred
independence, now demanded it. Liberals in power meant
anti-clericalism, freedom of the press, reform— the end
of special privileges. It was not surprising that those
for immediate independence from Spain were the upper
rth.
clergy, the Spaniards, and the Conservative Creoles/
The liberals In Mexico were caught napping. They were
disorganized, discouraged, and unable to take advantage
of the situation.
The final struggle for independence was rather
perfunctory. On September 21, 1821, Mexico was free at
last. Instrumental in the struggle xvas Colonel Agustin
de Iturbe, a dedicated opportunist. With the aid of the
conservative element, Iturbe declared himself Emperor
of the Mexican Empire. He "ruled1 1 until February, 1823--
when he had to flee to Italy. Iturbe*s seizure of power
was the triumph of the lawless force, and Mexico was to
3^Ibid.. p. 216.
14-2
experience over and over again this type of political
3 * 5
irresponsibility and plunder of her resources/^
When the authoritarian system of Spain collapsed,
it left no body of citizens in Mexico trained to assume
the responsibility of government. The so-called ruling
class of Mexico was no ruling class in the sense that
it could take over the machinery of public administra
tion, government finance and planning, collecting taxes,
«
and spending in the Interest of the country. The more
respectable Creoles as a rule avoided politics. It is
not difficult, therefore, to account for the conse
quences. The same elements that overthrew the Spanish
government continued to overthrow every government that
threatened its privileges and position. A responsible
President would not risk another revolution by attempt
ing to tax properly the only group able to pay taxes
IV. THE INTERLUDE: THE FEDERALISTS
VERSUS THE CENTRALISTS
In the decades that followed Independence, the
country fell an easy prey to the first uniformed oppor-
35Ibid., p. 218.
^^Worcester and Schaeffer, 0£. clt., p. 627.
143
tunist who had the power to enforce his will. This is,
of course, a characteristic not unique to Mexico, but
rather commonplace in the history of Latin America as a
whole. And in this light, the obvious and inevitable
followed. With the exception of Benito Juarez, Mexico
was ruled by generals for the most part of the nineteenth
century.
The era from 1824 to 1857 represents years of ex
perimentation and struggles of a nation seeking defini
tion and direction. Crystallzation of common goals were
virtually impossible due to the diverse Interests and
deep-rooted traditions. As noted, leadership was want
ing, and the largest portion of the population was abys
mally poor and ignorant. Two strong factions directed
the destiny of the young nation— the Centralists and the
Federalists.
The Centralist Party
The Centralists were strongly nationalistic, ec
onomically and politically conservative, and culturally,
European catholics. The power base was centered in the
capital of the nation. Their coalition Included the
military,.the Church, and the Creole upper class. ^ If
37
'Simpson, oj). clt.. p. 206.
144
social and governmental stability had been possible, it
is believed that the Centralists' goals for economic
growth would have been an agriculture-industrial program,
combined with extractive industries and foreign trade.
Basically, and in view of industrial evidence, Mexico
would have emphasized the role of a supplier of raw
materials to rising industrial nations. This prognosis
is not entirely unreasonable, since the growth of the
economy depended on the decisions of the landowners and
traders.
In the area of government, the Centralist was
dominated by a demagogue, General Antonio Lopez de Santa
Anna. A few historians classified him as "colorful,"
but most writers believe he was the worst influence to
Mexico at a time when the country's economy was in a
desperate state of affairs. Santa Anna's military under
takings put the young nation under heavy debt to the
European powers, while Mexico starved for social over
head capital. In fact, it was Mexico's Inability to
service her debts that served the excuse for the French
Invasion and French Empire in the early i860's.
The Federalist Party
Utilitarian in tradition, the Federalists viewed
the economy as a loose collection of small sovereignties.
1^5
These sovereign states, held together in a mutually
beneficial national association, viewed as their rep
resentative a limited national government, whose chief
feature was a small, but well trained bureaucracy con
trolled by congress. The Federalists tended to be rural-
minded. They distrusted urban life and its ways of
living. Socially, they were confirmed provincials.
The Federalists held great admiration for the
United States of North America— the only republic at
that time operating successfully on federal principles.
They attributed the power and economic growth of the
United States to its decentralized political system.
There was, however, a great difference between the
social and economic background of Mexico and the United
States. Moreover, the Federalists stressed localism,
the political and economic Interests of a region. In
time, particularly during the Dias dictatorship, this
system became a part of the economic structure of Mexico;
with local monopolies and small markets. When Mexico
came to grips with the modern problem of economic growth,
localism stood as a severe obstacle to national develop
ment .
Shortly after the fall, "Emperor" Iturbe, the
Federalist, had a brief taste of power. The Federalists
t
I
146
drew up the first republican Constitution of 1824— a
document comparable to our own constitution. The role
of government was one of decentralization, and further
more, the Federalists sought a departure from the Spanish
traditions. Yet, paradoxically, the Federalist system
was based on the fallacy that the old Spanish provinces
had somehow been Independent nations, each rendering a
culture and destiny of their own. Such a scheme of
things was probably unrealistic for the needs of a
young nation, which, moreover, lacked the proper social
climate for growth, even in terms of that day.
V. SUMMARY AND CONCLUSIONS
The latifundia system, and the social and ec
onomic Institutions which were to prevail in Mexico for
over 350 years, left deep-rooted traditions--too rigid
for an evolutionary social and economic process to yield
the social change needed by the end of the nineteenth
century. The traditional Institutions were represented
by the system of large estates (latifundia) worked and
supported by the vast illiterate Indian population; the
Church which owned about half of the arable land of
Mexico and which held considerable political, economic,
and spiritual power over the Mexican community; and the
1^7
military establishment, which, throughout the nineteenth
century, served Its own interest as well as those of the
haciandados and the Church.
After Independence, Mexico found herself seeking
identity and unity as a young nation. She attempted to
Incorporate the nineteenth century European liberalism—
an effort which was doomed to failure and later lamented
by Benito Juarez. The series of government administra
tions, from 1821 to 1858, experienced considerable social
upheavals caused primarily by social and political in
stability. No single government administration was able
to establish legitimacy due to lack of consensus and
popular participation; nor were leaders during this
period able to maintain political control over hostile
factions, ambitious generals, and special interests.
The nation, moreover, suffered from a dearth of able
statesmen and public administrators. The rigid colonial
controls by authoritarian Spain gave little or no oppor
tunity to native Mexicans to acquire experience in public
administration, public finance, and in the political pro
cess of government for obtaining orderly social and ec
onomic goals. As a result of this dilemma, the nation
was ruled by a series of generals whose interests on the
whole did not correspond with those of the nation.
1^8
However, in spite of the political turmoil and
conflicting economic Interests, the Federalists were able
to establish the Constitution of 182*4-— a liberal politi
cal and economic document that later served as the basis
for the Constitution of 1858. These two constitutions
were based on the concept of "Federalism" and afforded
government no legitimacy of central power to direct or
influence the nation's social and economic development.
In fact, for many decades to come the nation was to be
ruled not by an institutionalized government, but by
Caudillos, or strongmen, who were accustomed to the wide
spread practice of personalism.
Agriculture and mining were the main sources of
national Income during the decades following Independence.
But, the social turmoil and military escapades denied
the economy an effective use of resources. The fluctu
ations In exports limited the government's one major
source of revenue, thereby preventing the development of
an infrastructure even In terms of that day. Finally,
the chronic need for revenues and the persistent deficits
forced the various administrations to borrow from the
European financial centers and governments. However,
the inability to service the mounting public debt eventu
ally led to the French occupation and the rise of Benito
1^9
Juarez, whose nationalism served as part of the ideology
of the Revolution of 1910.
CHAPTER V
THE EVOLUTION OF MODERN GOVERNMENT:
THE JUAREZ AND DIAZ ADMINISTRATIONS
Every developing nation generates Its own set of
expectations "between the role of government in civil and
economic matters, and the attitude Its citizens hold to
ward that government. In other words, the people may ex
pect their government to be aggressive or passive, parti
ularlstic or uniform in treatment of justice, efficient
or Inefficient In performance. Over a period of time,
these attitudes tend to be dynamic. There are, however,
some basic understandings and expectations In the case
of the Mexican people and their government that go quite
deeply Into Mexican political and economic history. The
era of reform, synthesized in the Constitution of 1857
and the Juarez Administration, are some of the signifi
cant roots of modern-day Mexico.
I. EARLY REFORM AND THE
JUAREZ GOVERNMENT
As with early reforms in Europe, the Mexican
Reform marked the destruction of feudalism and of
151
political and economic privileges. The major advocates
of the reform were the Federalists. Their purpose was to
establish a constitutional government, and to abolish the
independent powers of the clergy, the generals, and the
landowners. They sought to stimulate economic progress
by putting into circulation the properties of the church,^-
and by building a country of small landholders, each with
his own farm purchased from the large church holding.
Thus, the reformers envisaged Mexico as a future land of
2
yeoman farmers, little realizing that smallness of land
holdings leads to low productivity.
The Reform had all the semblance of a bourgeois
revolution, carried out by and for mestizos. It brought
a new class to power, but did not remedy the social and
economic plight of the masses. Nonetheless, the Reform
marked a decisive turning point in the history of Mexico.
It gave political power to the Mestizos, who governed
with an energy and efficiency never displayed by the
Creoles. The spirit of the reform gave government a
^"Henry Bamford Parkes, A History of Mexico (Bos
ton: Houghton Mifflin Company, i960), pi 233~I
2
Howard F. Cline, Mexico. Revolution to Evolution,
19*4-0-1960 (New York: Oxford University Press, 1963)»
p.19-
152
definite role which made possible, in later generations,
significant economic development. In spite of the in
justices which accompanied it, the reform set down the
3
preliminary rules for subsequent social improvements.
The Ley Juarez— Its Social Significance
By 1855. the reform government plunged into a
series of legislative changes. These reforms were aimed
at promoting Mexican social justice with a strong econo
mic Import. The first gun fired was Ley Juarez (or Law
Juarez), which was passed on November 23, 1855* It was
designed to restrict the military and the jurisdiction of
ecclesiastical courts to bona-fide ecclesiastical cases.
These courts had long been the refuge of influential lay
men who were In some way connected with the church. The
Ley Juarez asserted the supremacy of the civil courts.
While the measure was justifiable, it raised a political
storm of protest because It rubbed across the sensitive
nerve ends of the two most powerful institutions In Mex
ico; but the reformers plunged ahead.
Ley Lerdo--Its Economic Significance
Ley Lerdo (or Law Lerdo) passed In June, 1856,
3
Parkes, loc. clt
153
had far-reaching repercussions at that time and on the
future of Mexico. Its purpose was twofold: to increase
h ,
government revenues, and to stimulate economic progress.
The material means of the measure suggests the fundamen
tal reason for the law. Ley Lerdo was aimed at the
church and civic communities. The law prohibited corpor
ations (churches) from holding real property. Specifi
cally, the law had three basic tenets: (1) the destruc
tion of the economic power of the clergy by forcing them
to sell church lands (haciendas, vast landholdings); (2)
with the proceeds from the transfer tax on sales of church
lands the government hoped to finance itself; and (3)
it intended to create a new class of small proprietors
by breaking up the communal holdings of the Indian vil
lages— for the liberal reformers were saturated with
laissez-faire doctrine.-^
Ley Lerdo brought strong reaction, not only from
the church, but from the Indian communities as well. The
reformers indicated that the law forbade all corporations
of any kind to own estates. All lands must be the pro
perty of individuals. Thus, Ley Lerdo ordered the e.1 idos
(or Indian Communals) attached to the Spanish towns, and,
^Ibld.. p. 23^.
^Simpson, ojd. o l t . , p. 2 ^ 2 .
15^
even worse, of those which belonged to the Indian villages,
to be sold.^ The results were disappointing, if not dis
astrous. Many of the richer Mexicans were dissuaded by
the clergy from taking advantage of the anti-clerical law,
so that the persons who benefited were mainly foreigners.
The unexpected consequence of Ley Lerdo was the
stripping of the native communities of their traditional
holdings oc communal lands. Bent on emulating the Eng
lish classical school of economics, and therefore to en
courage small property Interests, the Reformers consid
ered village governments to be corporate groups, equally
required to rid themselves of land. In the ensuing sales,
outsiders, rather than villagers, acquired the best
7
plots.' The underlying reasons for such measures at that
period of history stem from the influence of the English
economists. The Federalist economic theory was based on
the idea of the sanctity of private property and its dy
namic impact upon the middle class virtues of thrift,
hard work, and morality. But the English social environ
ment differed widely from the Mexican society, reducing
the suitability of laissez-faire and minimum government
for the Mexico of that day.
^Parkes, ojo. clt. . p. 235
^Cline, ojd. clt.. pp. ^ 5-^ 6 .
155
The Major Reform Movement
The role of government as designed by the Consti
tution of 1857 was not one that outlined the economic re
sponsibility of government as an instrument for economic
growth. Rather, the constitution was designed to make
Mexico a liberal, democratic republic. Its purpose was
to redress the traditional injustices to the various so
cial classes other than the landowners, the church, and
O
the military. The main quest of the liberals was poli
tical emancipation. But a type of Anglo-Saxon democracy
was imposed upon a country of peonage and illiteracy.^
The new constitution set up a representative government
of a single house, since the old Senate too often revealed
conservative leanings. A federal system was continued,
thus promoting state autonomy and localism.
On the other hand, the new constitution reflected
parallels peculiar of the centralist traditions of French
Jacobinism which was something of a paradox. Congress was
given the power to remove state governors by Impeachment.
While in appearance the powers of the President were re
stricted, in reality he could make himself supreme.'1 '0
8Ibid.
9
Parkes, ££>. cit. , p. 237-
1QIbld., p. 238.
156
This power was later exercised extensively by Dictator
Porflrio Diaz without seemingly violating the spirit of
the constitution. This unique arrangement in federalism
was later extended to give the President even greater
powers under the Constitution of 1917- These powers are
used today, however, for the advancement of economic de
velopment in the form of social overhead capital and
government participation in the private sector.
In sum, the Constitution of 1857 set out to
make Mexico a liberal, democratic republic and to redress
the exploitation and social injustices of the past. The
new constitution, in final analysis, addressed Itself
almost entirely to solving political problems, with scant
attention to the monumental economic difficulties of the
day, and concrete measures for improvements. Within a
few years, Dictator Diaz faced these Issues and initiated
the first significant step towards economic growth, but
at a high cost to the Indian population, and in a rather
undemocratic way.
Benito Juarez and the Reform Government
The somber figure of Benito Juarez, a Zapotec
Indian from Oaxaca, stands as one of the leading stars in
the firmament of Mexico's national heroes. He is one of
the main social architects of the Reform— the format of
present-day Mexico. Yet, as Dr. Lesley Simpson remarked,
157
". . .of all the national heroes of Mexico, Juarez is
one of the most difficult to see clearly because of the
thick foliage of myth that has overgrown about him."^
Born of a humble Zapotec family, he overcame the
handicaps of his environment through a benefactor who
wished to educate Juarez for the clergy--a career which
he abandoned after some years in the seminary. He stud
ied law and achieved distinction by his efforts alone.
After a period as a teacher and a lawyer, Juarez served
in the state legislature. In 1846, Juarez was elected to
the short-lived liberal congress and served until it was
dissolved by Santa Anna in 1847.
On his return to his native state of Oaxaca,
Juarez was elected governor. In this capacity, he served
well, and in keeping with Adam Smith's virtues, he bal
anced the budget, leaving a surplus in the state treas
ury. This was a rarity, especially in his day. Among
his qualities as a liberal leader, Juarez's honesty and
personal integrity were like a lush oasis in the vast
desert of corruption and intrigue in the government of
his day.
After the turbulance, social eruptions, and the
■^Simpson, ojd. clt. p. 246.
158
struggles of the Reform, Juarez became constitutional
president of a government In exile (at least from the
capltol) by the defection of President Comonfort in
1857. A three year’s war dragged on, bleeding Mexico of
its scant resources, and hopelessly depressing its trade.
In January 1, 1861, victorious Juarez returned to the
capltol, and for the first time Mexico was ruled by a
civilian. But his first government was short-lived.
Commerce and agriculture were at its lowest ebb. Tax
receipts were nil. The monthly deficit of the treasury
12
was ij-00,000 pesos.
The creoles and the conservative echelon had not
surrendered to the reform entirely. They mustered the
support of Napolean III of France who eyed the Latin
American world as a base for the expression of French
manifest destiny. The exiled Mexicans in Paris were
willing to sell Mexico as a monarchy to the French if
only they recovered their position and their confiscated
properties in Mexico, Under the pretense of collecting
Mexico's long overdue debts to French business, Napoleon
Ill's army invaded Mexico and eventually installed Maxi-
millian I and Carlotta as "rulers" under a monarchy.
12Ibld., p. 25 0.
159
Juarez's ragged army was driven to the mountains
of northern Mexico. But the French did not count on two
things: Juarez, the man of law, the high priest of un
swerving legalism, with a puritanical belief in his own
rightness; and Juarez's unyielding, rocklike tenacity in
the face of the most appalling circumstances.
At the end of the Civil War in the United States,
President Andrew Johnson suggested that the French army
leave Mexico. France was already having difficulty with
Chancellor Bismarck of Germany. Besides, Napoleon III
realized Mexico was a lost cause. Maximillian was de
feated by the liberal forces of Juarez, with the aid of
military equipment from the United States. The "Mexican
Emperor" was condemned to death by a military court and
executed over the protest of many European powers. There
were no exceptions to the Law of Juarez--the number one
1B
enemy of monarchy and centralism. Once and for all,
the issue of monarchy in Mexico came to an end.
Juarez faced appalling and chaotic economic and
political conditions; but he faced them confidently or
stoically. Although quite limited, some foundations for
economic growth in the form of social overhead capital
13Ibld. , p. 25*4-
160
were initiated by the Juarez government. Juarez, him
self, a student of Laissez-faire and Physiocracy, saw
the need for participation of the public sector in the
growth of the economy. A summary of these efforts is
outlined at the end of the present chapter.
But the Juarez government had its disappoint
ments. Juarez knew that the task of reconstruction was
slow and difficult. "When a society like ours," he de
clared, "has had the misfortune to pass through years of
intense upheavals, it is seamed through with vices whose
profound roots cannot be extirpated either in a single
day or by any single measure." Juarez failed in his
basic objective. Liberalism in a country of illiterate
Indians was doomed to failure. Equally disappointing
was his failure to transform the Indians into peasant
proprietors. But as long as Juarez remained president,
the ejldos of the Indian villages were safe, in the Ley
Lerdo. That benevolent shelter ended with the subse
quent Diaz dictatorship.
Since man is mortal, his departure from temporal
life is sometimes untimely--before his efforts begin to
^Parkes, o£. clt., p. 277.
15Ibid., p. 278.
l6l
bear some fruit. On July 18, 1872, Benito Juarez died--
the stern patriot, the man of law, the symbol of a Mexico
still on the horizon. And with his death, an era came to
an end.
II. PORFIRIO DIAZ, 1876-1910
An abrupt change took place upon the death of
Benito Juarez. Porfirio Diaz, also a part Zapotec In
dian, the cuadillo of Oaxaca, and a bitter enemy of Juar
ez, succeeded the latter. Diaz ruled Mexico for thirty-
four years, 1876-1910. The rule was despotic, but under
the cloak of the liberal constitution of 1857 that Juarez
and his followers fought many years to establish. When
Diaz seized power in 1876, he changed the national flow
and direction begun by Juarez. The latter was character
ized by national reform and early "Mexicanlsm"; Diaz
represented materialism and development through foreign
sources based on despotic government and neo-colonial
traditions.
There are two sharp camps of opinion as to Diaz's
place among the Mexican leaders. One opinion holds that
Mexico received its first Impetus of capital development
In the modern sense under Porfirio Diaz. Other groups
claim that the price paid by Mexico's vast illiterate
Indian population, in addition to the sacrifice of the
162
excessive capital returns that left Mexico, far out
weighed the national benefits.
As for civil liberty and social equity, the price
was even higher, Diaz often said that an illiterate,
backward country could not afford the luxury of democra
tic processes. It is in the area of political stability,
therefore, where the Diaz regime served as the back
ground for resource development by foreign capital.
In pure economic terms, on the other hand, the
development of productive capacity is never attained with
out the sacrifice of many alternative needs by consumers,
particularly if resources are quite scarce to begin with.
Productive capital (and higher productivity) cannot be
attained without considerable sacrifice of resources for
current consumption. In other words, aggregate demand
cannot be increased in real terms without first Increas
ing the productiveness of aggregate supply. This econo
mic process Is all the more trying In a society lacking
the social and psychological orientation necessary, as in
the case of Mexico at that time.
Mexico Wanted Political Stability
Porfirio Diaz had fought on the liberal side,
along with Juarez, against the centralists. But Juarez
never trusted him, and Diaz never forgave Juarez. When
163
Diaz came to power, he realized that Mexico wanted peace,
almost at any price. There had been fifty years of blood
shed and considerable waste of resources since independ
ence. Social stability was badly needed. Diaz, the man,
and the conditions of the times came together.
The Diaz administration became a full political
dictatorship. Don Porfirio rewarded his aids and friends,
and even invited his enemies to the altar of feast— or
else. He was fond of an old Spanish proverb: Perro con
hueso en la boca, no mata, rii roba (Dog with bone in
mouth neither kills nor steals). Unlike Juarez, Diaz
did not disband the army generals. He kept them on gov
ernment payrolls with an army of no military signifi
cance. He played one general against another, or even
against a state governor.
Diaz also built up a large government bureau
cracy of intellectuals. He kept them happy itfith jobs
and income. He could also keep an eye on them. But
much of his power (and the terror of peasantry) depended
on his colorful Hurales--national police force. The
country suffered from a chronic plague of banditry. Diaz
found an easy solution. He formed the Rurales (responsi
ble only to him), recruited from gunmen of the cities,
and from among the bandits themselves. He gave them
glittering uniforms, very good pay, and the power to
164
shoot on sight with no questions asked. Banditry disap
peared. The Rurales also served well on matters of labor
problems with Indians from agriculture, mines, and fac
tories. At last Mexico achieved the stability essential
for growth— a stability never attained in the preceding
fifty years.
Foreign Investment and Growth
Diaz sought to turn Mexico into a modern nation.
However, this concept he viewed only in terms of physical
improvements. The quickest way to achieve economic
growth he felt, was by foreign private capital. The Mex
ican public and Indian lands were held wide open for for
eigners. Before long, Mexico began to receive the over
flow of European and North American capital from late
nineteenth century indistrial growth. Mexico became the
supplier of raw products destined for North America and
Europe.
Foreign capital entered all the areas of the
economy. Millions of acres of public and Indian lands
were turned over to foreigners for agriculture and mining.
Oil, precious metals, and industrial minerals were ex
ploited, mainly by North Americans and British. The
North Americans, however, dominated the vast cattle and
cotton development in northern Mexico, along the United
165
States-Mexican border. The Internal markets, textile
manufacturning, and general commerce were mainly in the
hands of the French and Spaniards.
One of the greatest contributions to social over
head capital by Diaz was expansion of railroads, from ^00
miles built partly by Juarez and Lerdo (1873) to 15.000
miles by the time the Diaz dictatorship ended. Moreover,
the nation's credit was eventually put in good order— a
far cry from previous decades. Diaz recognized some of
the previous foreign debts, at times at a discount. The
servicing of these debts, however, added to the drain of
domestic resources. But Mexico’s credit rating soared
16
in foreign exchanges. Foreign investors were anxious
to invest in Mexico.
Regardless of the motives and the frightful means,
the Diaz regime produced the first Mexican government with
a goal toward economic development. The development of
course, was, entirely foreign-oriented. The government
was not a participant in Investments and economic deci
sions. The Diaz government facilitated the conditions
necessary for foreign exploitation. Diaz's concepts of
the Mexican economy, therefore, were a trichotomy: (1)
16
Brandenburg, o£. clt., p. 37*
166
the government was charged with maintaining the condi
tions which would attract outside capital; (2) the for
eign private sector was charged with promoting the coun
try's growth through investment; and (3) some chosen
parts of the domestic private sector were bound to bene-
17
fit from the creative activities of the foreigners.
On the Laissez-Faire Climate in the Economy
The general role of government under Diaz was a
bizarre application of laissez-faire. The English social-
economic ideas of the classical school called for minimum
government. But the English social climate differed
widely, as noted, from the Mexican environment, where
much government policing was employed to maintain the
"investment climate." Moreover, the Mexican government
was particularistic in dealing with foreign investors on
taxation, import and export duties, et cetera.
Adam Smith, J. S. Mill, and Alfred Marshall had
demonstrated that on certain well-defined assumptions the
Interference of government by regulations could hamper the
optimum performance of a nation's economy. Charles Darwin
on biology, and Herbert Spencer on human society had
argued that there were the weak and the strong in every
17
Raymond Vernon, The Dilemma of Mexico's Develop-
ment (Cambridge, Massachusetts; Harvard University Press
1953). PP. 38-39.
167
18
system and that the fittest tended to survive. Their
Ideas were used by the Diaz administratIon to justify the
suppression of the vast landless Indian population* the
granting of concessions to a large number of foreign
entrepreneurs and Mexican capitalists, and the use of
government power as support to an otherwise unhampered
business community.
The Clentlflcos as Public Entrepreneurs
Diaz surrounded himself with an upper class intel
lectual group known as clentlflcos (scientists) who were
convinced of the above social theories. They believed In
the supremacy of cultural groups such as the late nine
teenth century European and North American with their
superiority based on the innate qualities of Its people.
They felt that the Indian culture was inferior and even-
19 '
tually would succumb. The clentlflcos of the Diaz ad
ministration believed in the superior elements of a so
ciety. They felt that there should be maximum freedom of
economic opportunity for the elite group who would elevate
Mexican society as a whole. In a Schumpeterian sense,
18
ibid., pp. 50-51.
1^Brandenburg, o£. cit. , p. ^1.
168
these clentlflcos were the early "entrepreneurs of the
public sector"-- the genesis of the tecnlcos present-day
government: the technicians and economists.
United States: The Largest Investor
The success of economic growth depended almost
entirely on foreign capital. But foreign investors de
manded that earnings on capital be transferred to the
country of origin. Two problems were apparent: first,
the success of Mexican raw products in foreign markets
depended on lower prices at the expense of low, or cheap
wages; second, the use of capital investment and the earn
ings to owners of capital were not accompanied by signi
ficant increases in the real income of the Indian popula
tion. This latter condition was one of the underlying
reasons for the blood bath that followed the Revolution
of 1910.20
The genesis of Mexico's industrialization under
Diaz was to a significant measure tied to the industrial
growth of the United States. North American investments
in Mexico rose from 200 million in the 1890's to 1.1 bil
lion by 1911. The growth of British and French invest
ments was significant, but more modest in comparison to
20
Vernon, o£. clt., p. kZ.
169
North America. By the same token, the financial crisis
of 1907 in the United States undermined the export trade
of Mexico's agricultural products and industrial miner
als.
Evaluation of Economic Growth Under Diaz
The economic aspects of development under Diaz
follow certain classical lines, including associated so
cial and economic shortcomings. As discussed in Chapter
II, some economists have gone so far as to argue that in
ternational trade, far from encouraging the growth of
underdeveloped countries, has actually retarded it by
accentuating the dualist nature of the economy. For ex
ample, the (bad) "backwash" effect outweighs the (good)
"spread" effects. Moreover, there is the long-run ten
dency for the terms of trade to turn against countries
21
exporting raw materials and food-stuffs. In the light
of these factors, it is possible to analyze and draw par
allels to the case of the Diaz administration.
Underdeveloped countries experienced development
during the nineteenth and twentieth centuries, as in the
case of Mexico. Their exports expanded very rapidly.
Benjamin Higgins, Economic Development Princi
ples. Problems, and Policies (New York; W. W. Norton
and Company, Inc., 1959), pT 3^5•
170
There was no dearth of capital In profitable export in
dustries since they could borrow capital on equal terms
with firms in advanced nations. But the growth in export
value had no multiplier effect on the per capita incomes
in the rest of the underdeveloped economy.
Mexico’s growth was almost entirely dependent on
foreign capital, whose very nature of operation worked
against the spread effect because of the willingness of
workers to accept very low wages (especially rural labor)
in Mexico. Also, foreign entrepreneurs employed labor
and land intensively, and gave little generalized train
ing to workers. This contributed to low wages and a neg
ligible effective demand on the part of the peasantry.
In addition, the "comparative cost" doctrine of
the classical theory of International trade is largely
inapplicable in underdeveloped countries. It assumes full
employment of labor and other resources, a high Internal
mobility of the factors of production, and a high elas
ticity of demand for goods. In the case of Mexico, de
mand for raw products was inelastic, and the expansion of
the export sector was attained without any decline in
domestic production because of the large labor surplus.
Furthermore, these labor surpluses and population pres
sures led to highly labor-intensive and unproductive
employment in the rural sector.
171
Foreign trade tends to be most Important when In
comes are lowest. And, fluctuations In the volume of
foreign trade tend to be proportionately more violent,
and more important, to the underdeveloped economy. It
was noted that growth under Diaz was based on foreign
trade, and the heaviest foreign Investor was the United
LStates. It Is not surprising then, that the financial
crisis of 1907 in the United States had severe effects
on Mexico's exports and the internal economy. Banks
called in loans. There were business liquidations, and
even the government extended credit at this time as a
relief measure.
There Is little doubt that the above conditions
were some of the underlying reasons for the fall of
Diaz's government. But the more obvious, long-run factor
was the burden and exploitation of the vast rural popula
tion. This was not all. Inflation added to the severity
of the situation. Inflation, however, was not due to
government financing by deficits, since the government
was not materially Involved In the growth process. There
is reason to believe that inflation was caused partly by
the long-run adverse effects in the terms of trade, that
is the secular tendency for prices of Mexican exports to
172
22
decline relatively to the prices of their Imports.
Finally, as to the government's concern for wel
fare, Diaz's prime efforts were to induce foreign capital
into Mexico (where he attained a high degree of success),
and to build a political machine that would render stabil
ity to the nation and political power to himself. There
was one major group in the Mexican society which Diaz
did not count on or consider: the vast peasantry on the
land. Following positivist doctrine, Diaz and his cien-
tlficos believed that only a minority, "rational," and
productive group should be favored. The middle class,
with puritan virtues, and the foreign capitalists were
among the favored minority groups. To squander fiscal
resources on needless social overhead costs, or humani
tarian! sm and welfare programs among the Indians and mes
tizos was held to be unscientific, and an obvious econo
mic and political waste. Indians and mestizos could
23
wait. The success of Mexico's first stage of economic
development was characterized by Imbalance and technolo
gical dual1sm,
22
Ibid., pp. 3J L 17-348.
23
Cline, o£. clt. , p. 5^*
173
The End of a Dictator
The fall of the Diaz government was the result of
several conditions: the general stagnation after the
original impetus of foreign capital investments; the im
balance or lack of domestic social and economic goals for
the Mexicans; the heavy exploitation and social inequity
of the Indians; and increasing signs of senility in the
dictator.
Foreign capital was related to the needs of for
eign industrial markets, and not to the needs of domes
tic markets and real Income of the average Mexican. The
Federal Budget, for the first fifteen years of Diaz*dic
tatorship, was committed to debt servicing of European
and American loans. The budget was not balanced until
189*+. Diaz did not spend a great deal for social over
head capital, with one notable exception: the railroad.
He constructed the usual number of monuments to the
glory of a dictator, Including the controversial Palace
of Fine Arts.
A dictator is mortal--a reality the aged Diaz
attempted to ignore. Moreover, endless praises, at home
2^Donald E. Worcester and Wendell C. Schaeffer,
The Growth and Culture of Latin America (New York:
Oxford University Press, 1956). P*^ 7^6.
17^
and abroad, and saccharin flattery were heaped upon Diaz.
The day came when he believed them. On that day he had
lost touch with the realities of Mexico. For instance,
a new generation of intellectuals had grown up with dif
ferent ideas about the destiny of Mexico. An expanding
middle class resented the favoritism lavished on large
foreign investors. Not enough growth had trickled down
to them. Internally, the administration was decaying
from old age, and Diaz had forgotten to keep the people
busy and content. The election of a new president was
paramount, an issue the aged dictator tried to avoid.
Finally, at the bottom of the brewing caldron
were the millions of poverty-stricken, landless Indians
who had grown in number. The success of the Golden Age
of Don Porfirio was due in large measure to wage differ
entials, and, therefore, low prices of raw products to
industrial markets. Inflation also added to the plight
of the Indian population. Soon the world was to see that
Pax Porflrlana cost too much, for feudalism on the ha
ciendas had returned In a more cruel form— without the
benevolence of the Spaniards.
The underground swells of hatred by the oppressed
needed only a small fissure on the social crust to erupt
into holocaust and fury. Once again the blood of Mexico
would stain the gutters, streets, and the fields. The
175
aristocrat, the mestizo, the Indian blood was at last to
flow together in a monsterous ironic gesture of ambivo-
lence. This was the Revolution of 1910,
III SUMMARY: EVOLUTION OP THE
ROLE OP GOVERNMENT TO 1910
Father Miguel Hidalgo
The evolution of the modern role of government in
Mexico stems not from the authoritarian, mercantilistic,
feudal autocracy of the colonial period, but from the
Grito de Dolores led by Father Hidalgo. The cry for in
dependence led by the Creole priest did not embody a plan
of social order. It was chaotic. But it was a grass
roots expression of the Indians against the old norms
laced by Father Hidalgo with the heady spirits of the
French Revolution. It lacked a constructive direction.
It was a spontaneous explosion, declaring for the first
time, Mexico for the Mexicans--a credo later set in the
Constitution of 1917 by the Revolutionary Family of pre
sent-day Mexico.
Father Morelos — Blueprint for Economic Reform
Father Jose Maria Morelos' insurrection and drive
for national Independence embodied not only a military
176
organization, but a social and economic plan as well. He
wrote the first land reform advocating a country of small
landholders--later promulgated by Benito Juarez. His
concept of government proved him to be a political and
economic liberal. For example, he aimed at improving the
income distribution of the lower classes by eliminating
the regressive sales taxes and substituting a progressive
income tax to be borne by the higher Incomes— including
the import duties on goods purchased mainly by the upper
classes. However, Father Morelos’ social plans remained
simply a blueprint for the future, for he was executed
t o
several years before Mexico obtained her Independence.
The Constitution of 1857
The reform period (1855-1876), led by intellec
tuals and liberals, gave rise to the anticlerical, feder
alist, and republican Constitution of 1857* The role of
government as- designed by the new document was not one
that outlined the economic responsibility of government
as an instrument to economic growth. Rather, it was a
document redressing traditional injustices. The new con
stitution set the role of government as one of Federal
ism, not Centralism. The States were to have a high de
gree of autonomy in civil and fiscal administration.
(Later, under the Constitution of 1917. the taxing power
177
shifted to the central government. The President came to
exercise considerable political power over the States
through the allocation of tax funds to the various
States.)
The Economic Role of Government
Under Juarez and Diaz
The Juarez regime (and Later that of Diaz) was
based on the premise that the role of government in econ
omic development should be mainly passive in character.
The state should be the guarantor of security and stabil
ity, while the private sector should be the principal
26
economic means to Mexico's development. Juarez and Diaz
were not altogether consistent with the laissez-faire
credo, however. There were times when both realized the
need for a more aggressive role of the public sector in
view of the backwardness of the economy. Further, Juarez
was less prone to be particularistic.
The Juarez administration had little to work with.
Sources of revenue were most Inadequate, as the private
sector was in no condition to carry on the Investments
essential for growth. The country's resources had been
depleted by a half century of civil strife. The economy
was strapped with a heavy foreign debt, and foreign in
Vernon, o£. cit., p. 55-
178
vestors found the Mexican economy unattractive as long as
Mexico's internal security was uncertain. Moreover,
Juarez faced the problem of balanced growth (even for
that day) due to State autonomy, and localism in the form
of local monopolies which restricted importation of pro
ducts from other States. The new constitution and Fed
eralism supported this condition. The conversion of Mex
ico from a country of isolated little markets to national
markets did not take place until Porflrio Diaz came to
power.
The development of Mexico's basic resources dur
ing the Diaz regime was closely tied to the industrial
growth of North America and European nations, especially
the United States. Demand for Mexico's raw materials did
create some of the industries essential for later develop
ment. The big push for growth came from foreign invest
ments and exports to Industrial nations. The new income
of the nation established some basis for greater Internal
growth and a limited expansion of domestic markets. But
the main effort of the Diaz regime was to establish polit
ical stability. This encouraged the development of for
eign enterprises which generally engaged in the export of
raw products to the industrial factories of the advanced
economies. However, foreign investments of this sort
had little effect on the internal growth of the economy
179
as a whole. Mexican exports held a favorable position
in the foreign markets because of the very low labor
cost, but the growth of export value had no multiplier
effect on the per capita income of the economy.
The government budget did not play a major role
as an instrument for the development of the nation's
infrastructure. The economic data available for this
period Indicates that administrative expenditures
27
amounted to about 78 per cent of the total budget. ‘ A
good portion of these outlays included military and na
tional police expenditures, foreign debt servicing, and
support of a large bureaucracy.
As previously indicated, there was some growth
of domestic capital in the urban centers which produced
consumer goods. However, the low levels of purchasing
power of the rural population limited the expansion of
the consumer goods market. On the other hand, the ex
pansion of domestic industries, while contributing only a
minor portion to the gross national product, nonetheless
served as the basis for further economic growth after
the holocaust of 1910.
27
_ _ James W. Wilkie, The Mexican Revolution
(Berkeley: University of California Press, 1967).
p. 32.
CHAPTER VI
THE DEVELOPMENT OF THE POLITICAL AND
ECONOMIC ROLE OF GOVERNMENT, 1910/19^0
I. OVERVIEW AND CHRONOLOGY
In order to understand the current Mexican polit
ical climate, the unique type of centralized government or
the Presidential government, the widespread economic par
ticipation in the economy by the public sector, and the
meaning of the single-party political system, it is neces
sary to understand the political, social, and economic
conditions of the nineteenth century--and in particular
its latter half. Chapters IV and V presented some of the
background that Influenced the social change and environ
ment of modern Mexico. The break with the past, and the
dawn of a new era for Mexico, began with the downfall of
the dictatorship of Porflrio Diaz.
This chapter examines the period from the Revolu
tion of 1910 to the end of the Cardenas administration in
19^0. These three decades were socially, politically,
and economically dynamic In development. The revolution
181
ary period was a sharp break with the Diaz dictatorship
and the launching of social (and destructive) upheavals
as an expression of a nation which was seeking political
unity and agrarian reform. In this era, the leading re
volutionary leaders were Francisco Madero (1911-1913)»
whose efforts were mainly of a political nature, and
Emiliano Zapata (1910-1919). the rebel leader who stood
for agrarian reform.
The post revolutionary period was one in which
Carranza (1914-1920) emerged as a strong leader who ini
tiated the early agrarian reform and was Instrumental in
the formulation of the Constitution of 1917• Thus Car
ranza established the beginnings of political stability.
This was essential for the operation of a stable govern
ment, in his and in subsequent administrations.
Plutarco Calles served as President from 1924 to
1928. Constitutionally, a president could serve only one
term in office. However, behind the scenes Calles domi
nated the elections and operations of the presidential
offices of Alvaro Obregon (1920-1924), Emilio Portes Gil
and Abelardo Rodriguez (1929-1934).
The Cardenas administration set the modern role
of government in concrete terms as an agency for economic
development. During this period, a constitutional amend
182
ment extended the presidential term of office from four
to six years. This was for the purpose of allowing a
president, at that stage of development, to have suffi
cient time to Initiate public policy effectively. Thus,
Cardenas served from 193^ to 1940.
The leading dimensions in development from 1910
to 1940 fall into two broad classifications. The first
are the political and economic revolutions as witnessed
by the Revolution of 1910. The Carranza administration
(1914-1920) Initiated the early political unity and eco
nomic reform essential to subsequent government efforts
toward economic growth. This development was further
enhanced by Calles in the form of monetary reform, the
creation of the nation's central bank, tax exemptions,
and some developments in the nation's Infrastructure. The
Cardenas administration definitely established the govern
ment's role in the participation towards economic develop
ment. The "spirit of the revolution," plus the Constitu
tion of 191? which set broad outlines for the role of
government, flowered during the Cardenas regime. Land re
form reached its highest peak, a level never attained by
any other administration since Cardenas. Public enter
prises were established as part of the overall Infra
structure of the nation, and the government expropriated
183
some agricultural lands and most of the mineral foreign
holdings. Moreover, President Cardenas initiated the con
cept of deficit spending in fiscal policy as a measure for
economic development.
II. THE REVOLUTION OF 1910
The Revolution of 1910 was the result of growing
pressures from several factions within the Mexican popula
tion. The forces responsible for the final eruption, and
subsequent acts of violence, were classic, and represent
ed injustices based on social and economic struggles of
long standing. The Mexican Indian was by far the largest
group who unleased centuries-old hatreds. There were
other factions too. Some groups were pragmatic, and some
were idealistic. But all demanded a change from a colon
ial system to a better social and economic life.
The Revolution was broad in its economic goals and
lofty in its social ideas. Its underlying and immediate
aim was to redress traditional injustices. The most pres
sing demands were land reform for the vast Indian popula
tion, a drive for national economic independence, the
educational betterment of the nation, and a desire for a
stable political system with popular participation. Once
the Revolution became a fact, the greatest problem was a
18^
search for an effective government, a government that
would Implement the Immediate demands (land reform), the
ideals, and the "spirit" of that revolution. This quest
led to holocaust, bloodshed, and destruction of the na
tion's meager resources during the years of 1911 to 1917•
The idea of radical social change through revolu
tion seems to be of particular concern to students and
economists of underdevelopment studies. And not infre
quently a Western economist may express the view that a
revolution may be a necessary, though not a sufficient
condition for development in an economically backward
country. For example, Meier and Baldwin analyzed the pre
conditions for development without directly addressing
the problem of revolution and its relation to economic
development. However, a comparison of their general re
quirements for development with conditions actually pre
vailing in backward countries implies the same conclusions
as stated above.’ * '
On the other hand, a Marxian economist will not
shy from the idea of revolution. However, the reasoning
involved in his case is somewhat different, and the moti-
■ * ■ Gerald M. Meier and Robert E. Baldwin, Economic
Development, Theory, History, Policy (New York: John
Wiley & Sons, Inc., 1957). PP- 355-359.
185
vatlons and goals and the kind of revolution envisaged
2
are not the same as the case under discussion. The Mex
ican Revolution of 1910 did not have any Marxian overtones
or direction from Marxian disciples. It was a violently
eloquent grass-roots reaction, largely from an enraged
Indian population. It stemmed from meager income, a land
less peasantry, and a shrinking of a microscopic market
basket as Inflationary pressures persisted. It was not
until the 1920's that young Mexican Intellectuals began
to popularize Marxian ideas, originally in the labor move
ment .
Social Change
Other Western economists, such as W. Arthur Lewis
and Eugene Staley, have stressed revolutionary changes in
attitude and behavior, whether accompanied by outright po
litical revolution or not, as prerequisites for economic
development. Ordinarily, texts on economic development
Include a generous outline of preconditions to growth, in
some cases wholly on economic terms. In others, there is
an underlying Inference to a variety of social changes.
In a few cases there are texts that consider revolutionary
changes in the economic structure as well as social values
2
Paul A . Baran, The Political Economy of Growth
(New York: Monthly Review Press, 19&2), p. 2^8.
186
of a traditional society under autocratic or feudal sys
tems as preconditions to growth or as a precondition for
applying subsequently the mechanisties of economic theory,
and hence the most effective means of resource develop
ment .
To be sure, in 1910 Mexico made a significant so
cial and political break with the past. That kind of rev
olution was the first to occur in Latin America during the
twentieth century and has since then been duplicated only
by Cuba, Mexico, however, had considerably more "internal
orientation" than Cuba. Besides, times were different.
When the Revolution passed its preliminary stage,
one of reconciling conflicting interests, the establish
ment of an effective government, was a necessary step for
the Implementation of the new goals and the spirit of the
Revolution. In this, Mexico serves as a remarkable exam
ple to Latin America. Considering the backwardness of the
general population and cultural traditions, the country
achieved a modern miracle in escaping the grip of a com
mand economy. It was accomplished in part by the politi
cal struggle between ambitious political factions and
caudlllos^, where finally, one of the latter emerged vic-
^Tradltionally, a caudlllo was a political mili
tary leader who Imposed his own rule upon the nation, and
whose position was not based primarily upon constitutional
authority or very bound by it, but who could dominate the
political process and the country by the power he wielded.
187
torious and established a popular one-party system with
himself as head. A significant feature, furthermore, is
that the official party did not organize the apparatus of
a police state as the case in some countries.
The head of the party, the PRI (Partido Revolu-
cionarlo Instltuclonal), is the President of the country.
He possesses unquestioned authority throughout the eche
lons of the elaborate hierarchical structure of the PRI.
Today, this political organization, with about four mil
lion members, is very effective in engaging farmers and
rural population in politics as a way of keeping close
touch with the pulse of their needs. In fact the PRI is
the strongest political power over federal, state, and
municipal elections. In another section, this chapter
explains how the PRI is made up of functional interest
associations or "sectors:" Farm, Labor, and Popular.
Thus, the PRI and the Presidential government maintain
their position by reason of popular support, founded on
the achievement of the administrations Installed; by gen
erosity of welcoming new leaders Into the fold; by the
attention to the needs of the nation's many organized in
terest groups: and by what has been called "merciless
publicity" given by the government to the nation's social
4
and economic progress.
The main Interest In this Introduction Is the po
litical process of declsion-making which rests In the
Presidential government. This determines the measures
and policies for attaining social and economic goals. In
this way, Mexico obtained the political stability essen
tial for Investment and a development climate.
The Spirit of the Revolution
Today, Mexicans refer to "Revolutionary alms,"
which Is to say, simply the Ideals or aspirations any
individual or group may hold, for the Revolution means
different things to different people. For example, public
credit for a struggling private enterprise, budget allo
cation for a new irrigation project, or the protection of
some domestic product from foreign competition may be a
part of the Revolutionary spirit, depending, of course,
on who benefits by the measure. Thus, the Revolution has
stood generally as a modern symbol of progress applied to
the wide spectrum of social and economic life, while,
originally, the Revolution erupted as a means for breaking
with the past and Initiating land reform and social jus
tice.
4
Daniel Casio Villegas, "The Mexican Left", pp.
126-139 in Joseph Maier and Richard Weatherhead (eds.),
Politics of Change in Latin America (New York: Frederick
A~. Praeger, 19&4), p. 137.
189
Social theorists explain the revolutionary process
as a continuous change (although this writer's statement
is an over-simplification). The spirit and goals may
shift and new compromises may be made as old revolution
aries fall out, and new leaders re-evaluate new goals and
aspirations within the context of current values and prag
matic needs. The original revolution may pale as the
initial force is spent. Thus, claims and counterclaims
have been aired widely in modern Mexico as to whether the
Revolution is dead, whether it has been a success at all,
or whether it has been betrayed— falling short of the aims
of the Constitution of 1917 In a recent publication by
James H. Meisel, How Revolutions Die, the author presents
an historical account of the revolutionary process and
momentum. Mr. Stanley Karnow, the reviewer, said Mr.
Meisel's book was timely, "... when ideology seems to be
giving away to pragmatism." The following is a quotation
6
from Mr. Meisel's work:
"In the prerevolutionary phase, the ideologues
and plotters; in the springtime of the revolution,
the great orators and tribunes of the people;
then the harsh taskmasters of the dictatorial
climax; and finally the pragmatists of Thermidor."
■ " ’Stanley R. Ross, Is The Mexican Revolution Dead?
(New York: Alfred A. Knopp, 19^6), pp. 116-120.
^Stanley Karnow, "How Revolutions Die", New Re
public (June 10, 1967)* P- 2^-.
190
The above discussions are given to show contem
porary attitudes toward the meaning of the Revolution in
Mexico since much of its substance and pace have been
identified with the economic development of the nation.
It is of interest, therefore, whether the new spirit as
vested in the present governmental leaders deters or en
hances the (original) process of economic growth. The
present era of the Revolution appears to some observers
to be its true Thermidor, though the economic goals are
said to be far from realized. A brief evaluation of this
is included in the Conclusions of this study: Mexico, as
a nation, has accomplished an impressive rate of growth,
and much of the source of energy, driving force, and de
cisions are vested in the Presidential government— the
subject of prime Interest to this study.
The above discussion serves as an introduction to
the present chapter by presenting Mexico's dynamic atti
tudes and interpretations of the Revolution. The next
section of Chapter VI reviews and examines briefly some
of the pages of Mexico's darkest era following the blood
shed of 1910— the era when factions, local caudlllos, and
group Interests sought leadership and an effective govern
ment capable of either initiating social and economic re
forms according to popular favor, or maintaining the sta
tus quo for other factions. Ultimately, a new stable gov-
191
eminent, an institutionalized Presidency, emerged out of
the political debris of that era,
III. THE CHAOS OP 1910-1917
The literature on modern Mexico sets the year of
1910 as the beginning of contemporary Mexico. As noted
above, 1910 marked a departure from the old order (colo
nialism or neo-colonialism) to Western-type politics,
nationalism, and modern approaches to social and economic
development. The new era was hailed as one of the few
Important social movements of the twentieth-century in
Latin America. It also gave rise to a mystique which has
guided Mexican leaders and followers to greater efforts
7
for a better national life.
Earlier discussions have outlined the basic fac
tors which led to the Revolution. There were, however,
other invisible causes of political and economic import,
less discernable to a visitor's eye. For example, the
changes in social and economic conditions of the elite at
the beginning of the twentieth century gave rise to new
interest in domestic development. New social and economic
^Howard F. Cline, Mexico. Revolution to Evolution,
1940-1960 (New York: Oxford University Press, 19^3)
p. 24.
192
groups were anxious for a greater voice In national af
fairs. The old Diaz Administration did not satisfy all
the new interests, especially the young, mobile urban
classes. The old system lacked consensus with some of its
new vital organs as well as an integrated national poli
tics. Too, special privileges sapped or wasted the poten
tial economic energy, often by restricting the potential
aggregate domestic supply and by maintaining a maldistri
bution of income.
There was a visible need for ne*r political ex
pression, but its orderly development was hardly attain
able in view of the dearth of leadership. Besides, dic
tators have a way of ridding themselves of any effective
opposition. Consequently, a politico did not enjoy the
opportunity of popular exposure for forming effective
leadership and a following. Porfirio Diaz had seen to
that, and under these political conditions the Revolution
of 1910 thrust itself into the national scene.
It is not surprising that the lack of effective
leadership and national consensus led to a bloodbath dur
ing the years of 1911-1917• Caudlllos and military lead
ers from several sections of Mexico sought to gain control
of central power by bloody conflicts against each other,
while depleting the meager resources of the nation. Do
mestic and often International interests would finance a
193
caudillo or military leader in a counter-revolution.
Thus, the circumstances of the period prevented the rise
of a super-caudillo who could hope to succeed in providing
effective government for very long. Beyond the ever-pre
sent problems of selection and transferring power to some
other strong man when the time should come, the old-style
political system was inappropriate.
Personalism was a local and national tradition
among leaders. But personalistic control based on mili
tary force through which policy decisions were reached in
face-to-face meetings with the leader was no longer
enough, for the competing interests (political or econom
ic), which had to be satisfied, began to overbalance the
military alone. A more viable political system had to be
devised, based on means other than physical force, through
which the formal agencies of government could operate to
serve the complicated social and economic demands of the
g
nation. In other words, government had to be institution
alized. But the dynamics of transfer from government dom
inated by force and individual personality to government
9
by political organization are difficult to capture. This
was eventually attained by Plutarco Calles in the late
Robert E. Scott, Mexican Government in Transition
(Urbana: University of Illinois Press, 1959)t pp. 104-105-
9Ibid, p. 1 1 5.
19^
1920's and refined by Lazaro Ca'rdenas in 193*1-.
Early Revolutionary Leaders
After the fall of Diaz, one notable aspect in
Mexico’s social upheaval was the absence of a Revolution
ary Ideology. No common social philosophy prevailed in
the revolutionary circles; no caudillo or military group
10
was altogether dominant. There was a lack of consensus
about legitimate forms and purposes of political activity-
-a failing of a non-Western type political society. Ex
cept for the immediate motives of the Revolution (to over
throw the old order and initiate some type of land reform)
Mexico in fact suffered from too many "ideologies."
Robert E. Scott has said: "The intellectual
spokesmen of the Revolution range from one end of the po
litical spectrum to the other, each vocally defending his
own discrete interpretation of the movement."1' ' 1 ' The same
can probably be said of the men of action who did more to
shape the Revolution during the years of 1910-1917- But
they shared no common approach to the movement they led.
The early leaders saw the Revolution as principally politi
cal with no economic design or even a plan embodied in the
^^Raymond Vernon, The Dilemma of Mexico’s Develop
ment (Cambridge, Massachusetts: Harvard University Press,
1953), P- 62.
^Scott, op. c_it., p. 99-
195
movement. Land reform was, of course, a fact to reckon
with since it was part of the original grassroots move
ment. However, concrete participation by the main seg
ments of that society was essential before the government
could lead the nation with definite goals towards social
and economic development. The next section presents a
brief discussion of the contributions made by the early
leaders to revolutionary goals and action.
Francisco I. Madero. In the twilight of Porfirio
Diaz's political demise, Francisco I. Madero, a man of
small stature and high pitched voice, a scion of a rich
landholding family from the North and essentially of mo
derate views, dared write a book entitled The Presidential
Succession of 1910. It became the political slogan of
"Effective Suffrage and no Re-election." The book, a
statement of Madero’s brand of nineteenth century liberal
philosophy, was of no real intellectual signiflcance. But
the open defiance to the administration mustered enough
bravery for general dissension among the population--
especially the Intellectuals.
Madero was overwhelmed by the popular support,
and launched himself Into a role for which he had little
to recommend him. Several political and economic factors
were united to form the social force behind him. The
196
Intellectuals basically wanted political reform on the
European model, which was hardly applicable to Mexico's
stage of social development. The peasents and the city
workers responded to the revolutionary cry with determi
nation. The radical agrarianism of the landless peasents
and the anarcho-socialism of the workers amalgamated to
give the Revolution a new base. They, like the Intellec-
12
tuals, wanted political reform. But above all, the
main economic goal of the vast peasentry was bread and
land reform. This goal gave the Revolution its main vi
tality.
Open rebellion broke out in the North (In the
State of Chihuahua), led by vaquero Pascual Orozco and
Pancho Villa, the bandit who had turned Robin Hood. In
South-Central Mexico, Emillano Zapata's Indian army swept
over the land like waves of prairie fire filling the
winds with the cry "La tierra y la Libertad y la muerte
a los Haciendados!" (Land and Liberty, and death to the
landowners!) The revolutionary leaders and caudlllos
gathered momentum with one destination in mind— Mexico
City. Eventually, Francisco Madero became President by
popular acclaim on November 6, 1911. But from the begin-
John J. Johnson, Political Change in Latin Amer
ica (Stanford: Stanford University Press7 1956), p. 132.
197
nlng he was plagued by dilemmas and conflicts. There
were several reasons why his government failed to obtain
legitimacy.
Madero did not inherit the system of political
privileges and understanding which had given Diaz stabil
ity. Nor did he Inherit a constitutional system to which
everyone gave automatic allegiance. The Constitution of
1857» divorced from the Mexican environment at its begin
ning, was now an anachronism. Nonetheless, Madero sub
scribed to the nineteenth century liberalism of free
speech, a free press, the right of assembly--an unreal
istic social attitude in view of the many military leaders
13
and caudillos seeking personal gains. Consequently,
instead of enjoying a period of cooperation in errectlng
a new stable government, Madero was also faced with a
multiplicity of contradictory plans and programs thrust
upon him by all the political factions and by those who
lb
had any part in making his victory possible.
President Madero was also indecisive. Once in
office he procrastinated on agrarian reform which was a
serious mistake. Failing to take any positive steps, his
13
Lesley Byrd Simpson, Many Mexico1s (Berkeley:
University of California Press, 1966), p. 268.
1^
Johnson, loc. clt.
198
leading supporters and caudillos revolted against him:
Zapata in the South, Orozco and Pancho Villa in the North.
Once again the thunder of counter-revolution was heard all
over Mexico because, for the early revolutionary leaders,
and Zapata in particular, land reform was a central Issue.
These leaders put social reform first and political reform
second, while Madero favored the reverse of this combina
tion.1^
Moreover, Madero1s government lacked the neces
sary consensus and therefore the political stability to
initiate a social and economic program in order to raise
the economy out of the debris of social turmoil. His
rallying cry, "Effective suffrage, no re-election," ap
pealed only to a small group of intellectuals. This is
not all. To those who prospered under Diaz, Madero sym
bolized the threat of a return to impersonal government
under non-discriminatory law. To those who suffered un
der Diaz, Madero offered no relief; he made mild promises,
and there was no prospect of a swift redress of peasant
grievances.
Profoundly disturbed by the sudden changes in the
Mexican government, foreign businessmen and capitalists
began to look for a man who could re-establish order and
-’Frank Brandenburg, The Making of Modern Mexico
(Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1964-),
pp.48-49.
199
guarantee them the same protection they had enjoyed under
Diaz. One of Madero's oversights had been to discontinue
Don Porfirio's policy of protecting foreigners and their
property. Zapata, Villa, and lesser caudillos committed
!L 6
outrages and President Madero was unable to stop them.
With the assistance of the United States Ambassador, Hen
ry Lane Wilson, foreign business leaders chose the heavy
17
drinking and sadistic General Victorlano Huerta. A
reactionary coup followed and, on February 22, 1913t
Madero was shot "while attempting to escape," despite
Huerta's guarantee of personal safety.
Huerta's rule lasted seventeen months. It was
one of the most sordid tyrannies that ever befell a Latin
American nation. He managed to control the area around
Mexico City, but in the south Zapata remained unconquered
and busily engaged in redistributing land to his Indian
followers. In the north several caudillos remained re
bellious: Venustiano Carranza, the governor of Caohuila;
Alvaro Obregon, the governor of Sonora; and Pancho Villa,
the ex-bandit who had a genius for making the common Mex-
18
lean feel, not think. Ultimately, Carranza came to
^Simpson, o j d . clt. , p. 269.
17
Donald E. Worcester and Wendell G. Schaeffer,
The Growth and Culture of Latin America (New York: Oxford
Press, 1956), pp. 762-763.
"^Simpson, loc. clt.
200
power and Huerta fled to the United States where he drank
himself to death.
Madero1s Presidency clearly Indicated that future
heads of state had to be the rulers of the revolutionary
leaders and the Ideals— or else they do not last because
of failure to attain consensus from the various political
factions In order to implement social and economic re-
19
forms. But the assassination of Madero succeeded In
making him something he was never able to become in real
life: the undisputed first head of the Revolutionary
20
Family, the Apostle of Modern Mexico.
In sum, the failure of Madero to obtain the de
sired political and economic goals is due not only to his
lack of leadership, but to more significant and underly
ing reasons. Madero set into motion a spontaneous reac
tion to a number of very different problems, which in turn
produced what might be called two separate and simultan
eous revolutions. One was a political revolution that
sought modernization and national unity upon which to
base the development of permanent institutions of respon
sible government. Madero himself was not capable of im-
1^Brandenburg, op. clt. , p. 49.
20
Ibid. p. 51.
201
plementlng this process. The second was a social and
economic revolution, inevitably involving upheaval, class
conflicts, and dissension as it attempted to curb the
vested Interests of the old ruling elite to serve the
general population of Mexico. Both sets of aspirations
were true reflections of desires felt by large sectors
of the population, but it was not possible to carry out
21
the two revolutions at the same time. Political leader
ship and consensus had to be settled first.
Emlllano Zapata. This military caudlllo holds a
particular prominance in the early stage of the Revolu
tion. Zapata was the only military leader who was con
sistent in his goals. He had no truck with politics, but
wanted immediate economic reform in the form of land dis-
22
tribution. He fought against Diaz, gained control of
South-Central Mexico, and supported Madero for the Pres
idency. When he realized that Madero had no intentions
of Initiating land reform, he took arms against him. His
Plan of Ayala demanded land distribution. It called for
’’immediate seizure of those lands which had been taken
from the villages, the expropriation of one-third of the
21Scott, OJ3. clt. . p. 112.
22Ibld, p. 99.
202
lands held by haciendados who did not obstruct the revo
lution's course, and complete expropriation of lands held
23
by men who directly or indirectly opposed the plan."
2 k
Frank Tannenbaum of Columbia University said of Zapata:
He was a man of no learning, of no broad
social contacts, a simple, vigorous human be
ing who knew little of the sophisticated and
far away world on the other side of the
hills. . . . A story (and there are many
stories about Zapata. . .) Is told about him,
that when he was still a small child he said
to his weeping father, who had been robbed
of his land, "I will take them back when I
grow up."
The military leaders who managed to gain control
of the central government, from Madero to Carranza (1911-
1919). were always faced with the revolts and tenacity
of Zapata for agrarian reforms. However, once In the
Presidency, military leaders were concerned almost entire
ly with politics and power struggles rather than with
economic reform. Zapata's cry of "Land and Liberty" be
came embarrassing to Carranza's government. The liquida
tion of the "Attila of the South," according to Carranza,
was lndispensible, thus putting an end to the agrarian
23
C. C. Cumberland, Mexican Revolution (Austin,
Texas: University of Texas Press, 1951)» p.
2k
Frank Tannenbaum, Peace by Revolution (New York:
Macmillan & Co., 1929). P. 176.
203
25
agitation, and restoring domestic tranquility. In
April, 1919. with fifty thousand pesos on his head, Zapa
ta was maneuvered into an ambush. His corpse was hung in
the public square of Guantla in the State of Morelos.
The Zapata explosion of the South, as with Pancho
Villa in the North, never succeeded in incorporating the
basic goals of land reform in an organic plan, despite
the efforts of attendant intellectuals. The Zapatistas
were like a blazing tornado across the land, but they
really did not bring organization in the wake of the
chaos they created. They reflected, however, the age-old
problem of the peasantry. Their wounds were centuries
old: their demands were primitive and simple, and they
demanded a simple solution. By the same token they un
leashed primitive fury, thus raising high over Mexico an
idea too glaring and too powerful to be Ignored because
it stemmed from the most fundamental realities of the
conditions in Mexico.
Carranza and the Constitution of 1917
Venustiano Carranza is significant to this study
for three reasons. He was the first of the early revo
lutionary leaders to restore some semblance of political
25
Brandenburg, ££. clt. , p. 57•
204
stabllity after the fall of Porflrlo Diaz. Secondly, the
Constitution of 1917 was drafted during his Presidency.
This was a milestone for future social and economic de
velopment. Thirdly, Carranza set certain principles in
Mexican foreign policy that served as criteria to subse
quent administrations.
The assassination of Madero led to a period of
social turmoil and further national disunity--a condition
described in previous pages. Mexico lapsed quickly into
the sectionalism that its sparce population and difficult
terrain always encouraged. The Russian revolution pro
duced a Lenin to follow its Kerensky, The Mexican revo
lution followed a different pattern, as there was no
disciplined cadre to play the role of the Bolsheviks. It
has been noted that no common philosophy prevailed in
26
revolutionary circles. Political unity was essential
before social order and an effective government could be
established.
Carranza managed to create the necessary merger
of interests. He became the Prime Jefe of the Revolution.
To woo support, he declared decrees incorporating the main
points of the programs advanced by the various leaders:
O
Vernon, ojd. cit.. p. 62.
205
agrarian reform, labor rights, and nationalism (anti-
foreignism). On the latter issue, Carranza was an ada
mant nationalist in dealing with the United States and
other foreign powers, even when his victory in the revo-
2?
lutionary effort seemed doubtful.
President Carranza had, however, a "narrow" con
cept of the revolution. He believed that the workers and
the peasants could be manipulated after order returned to
Mexico. But they proved Carranza wrong. After nearly
four centuries of political impotence, the common man
would not surrender so easily the newly-won Influence in
national politics. Any lingering doubts as to the work
er's ability to keep alive their Indignation were removed
28
when the Constitution of 1917 was promulgated.
The land reform of 1915- Early in his Presidency,
in order to strengthen his position and to promote politi
cal unity, Carranza issued the Decree of 1915- This was
the first in a series of land reform measures designed to
meet the most pressing economic issue of the early revolu
tion. In fact, it was "the first constructive act" in the
sense that it was the first legal statement and an answer
27
L. Vincet Padgett, The Mexican Political System
(Boston: Houghton Mifflin Company, 1966), p^ 2k.
O Q
Johnson, o£. cit., pp. 133-13k.
206
to the agrarian demands of the large masses of rural popu-
29
latlon. Later, this agrarian reform was amplified in
the Constitution of 1917 and, while the measure left much
to be desired, Carranza obtained the national support he
30
needed.
The 1915 decree ordered that "all alienation of
village lands, forests, and waters affected by the mis
application of the law of June 26, I856, illegal acts of
surveying companies, through enclosures, or other illegal
31
means were null and void." Furthermore, as Eyler Sim
pson interpreted the rational of the law: (1) the in
habitants of the village were unable to defend their
property, and had no recourse but to hire themselves out
at ridiculous wages to powerful landlords. . . and, (2)
32
the villages which needed communal land or ejidos, or
which cannot secure their restoration because of lack of
titles or difficulty of Identification of titles, or be-
29
Eyler N. Simpson, The E.jldo: Mexico's Way Out
(Chapel Hill: The University of North Carolina Press,
1937), p- 5*K
30
Tannenbaum, o j d . clt., p. 59.
31
Elias H. Tuma, Twenty-six Centuries of Agrarian
Reform: A Comparative Analysis"(Berkeley: University of
California Press, 19&5)» p7l53•
32
The term "ejidos" is apparently used in the law
to cover all classes (crop lands, forests, pastures, et
cetera) of communal lands.
207
cause they have been legally alienated, shall have the
right to obtain a sufficient portion of land In accord-
33
ance with ,the necessities of the communities. Thus
the decree by inference upheld property rights on the
basis of "functional concept of property,, f that is, that
real property shall be contingent upon its use in ways
which are subordinate to the public interest rather than
natural rights and the doctrine of the English utilitar-
, 34
lans.
The Decree of 1915, later incorporated and ex
panded in Article 27 of the Constitution of 1917* did not
escape criticism, some of which is significant to this
35
study. E. Simpson offers the following: (1) the de
cree was primarily a "negative program," a procedure for
righting past wrongs, and not a "positive" plan with which
to face the economic problems of land reform; (2) the
language and spirit of the decree definitely put emphasis
on the Individual and not upon the village or group in its
corporate capacity (a contradiction to the implied theory
of property rights); (3) the decree inserted a provision
33
E. Simpson, o£. clt., pp. 56-57.
34
R. H. Tawney, The Acquisitive Society (New York:
Harcourt and Brace and Company, 1920), p. 20.
35
E. Simpson, op. cit., pp. 58-61.
208
recognizing the right of Injured parties to have recourse
to the ordinary courts against the actions of the govern
ment (although the decree provided compensation of ex
propriated properties at market value— an issue of para
mount significance in the oil controversy during the
Cardenas administration); and {^) the decree placed the
burden on the villages and not on the government. In
other words, villages in need of land must themselves
petition for it and support their petition by proof of
necessity.
The Constitution of 1917. Modern Mexican govern
ment is involved with the lives of its citizens more di
rectly and with greater frequency than is found customary
in the United States or in England, whose revolutions were
based on the premise that the least government was the
best. Today, however, there is a trend towards big
government among modern nations, and Mexico is a repre
sentative example of this evolution.
Mexico's constitutional convention was held in
1917- The delegates presented so many diverse political
views and aims that only two propositions held universal
agreement: (1) the groups which had dominated the poli
tical structure— the church, foreigners, and large lahd-
owners would have to surrender their power (Meaning their
land); and (2) the government should assume an active
209
responsibility in carrying out social and economic plans
in the interest of the nation.
The convention rubber-stamped about seventy per
cent of Carranza's working model, but it went far beyond
the First Chief on substantive matters of economic and
36
social welfare. The heart of these reforms were put
into Article 3 on religion, Article 130 on education,
Article 27 on the ownership of natural resources and
agrarian reform, and Article 123 on labor rights. The
last two articles were of major Importance to the pres
sing demands of the workers and the rural population.
The following outline presents an interpretation
of the major economic provisions of the Constitution.
First, though there is an organic link between the Con
stitutions of 1857 and 1917* there were also important
differences. In a broad sense, the Constitution of 1857
reflected the United State's constitution, the French
revolutionary constitutions, and the Spanish Constitution
of 1812, and was concerned with individual rights. The
earlier Mexican constitution took as its cornerstone the
advanced laissez-faire theories of the day, stressing
private initiative, and limiting the functions of gov-
37
eminent. Juarez, as discussed in Chapter V, subscribed
^Brandenburg, ojd. clt., p. 55-
-^Cline, o£. clt.. p. 136.
210
to these concepts--though incongrous with the social cli
mate of the day. Diaz adhered to what Dr. Vernon called
38
"a bizarre application of laissez-faire." It is under
standable, therefore, why the delegates to the convention
whittled away at the laissez-faire doctrine of the Juarez
39
document and its structure of decentralized power.
Second, the concept that government should not be
used to dispense economic favors was preserved by using
the old Juarez provision on that point (Ley Juarez, Chap
ter V)--a clause which forbids monopolies, special privi
leges, and tax exemptions.
Third, Article 27 made a sweeping redefinition of
the concept of private property directed at land held by
foreigners. It applied the principles of Spanish law
which had prevailed until the Porfirian era, to the effect
that the subsoil of Mexico belonged Irrevocably to the
nation. Foreigners were prohibited from acquiring any
surface or subsurface rights to Mexican lands unless they
gave up their claims to protection from their home govern
ments .
---------------------------------------------------------------- ~ \ j
3 8
Vernon, op. clt., p. 51*
39Ibid, p. 63.
211
Fourth, the constitution strengthened the posi
tive, active role of government, especially in social and
economic matters. The delegates enlarged the President's
power by granting him the right to veto, the right to
initiate legislation, freedom from easy Impeachment, and
the right to issue personal decrees under special circum
stances. Having done this, the delegates countered them
selves by providing for the "no re-election" clause to
prevent the President from becoming abusive of his new
A j - 0
powers, a provision on which Madero had based so much
of his political activities.
Contemporary views of the Constitution. An
earlier part of this chapter reviewed some current opin
ions as to whether the spirit of the revolution, in a
political sense, still prevailed as a motor to economic
growth among the PRI and administrators of the public
sector. Questions have been also raised as to whether
the Constitution and its various articles of economic
consequences are still significant guides to the growth
effort of the economy.
In a speech delivered at the National Center of
Foreign Commerce in Paris, the eminent Mexican economist,
Victor Alba, Las Ideas Soclales Contemporaneas
en Mexico (Mexico, D. F.: Fondo de Cultura Economica,
I960), p. 97.
212
Dr. Alfredo Navarrete (Director of Naclonal Flnanclera,
Mexico's major development "bank) referred to the Consti-
4 - 1
tution in the following way:
The social and economic development that
characterizes Mexico today is part of a pro
cess that had its beginnings with the Mexi
can Revolution.... Economic development is
accompanied by a structural transformation
which reflects an intense industrial de
velopment and a rapid extension of the in
frastructure of the economy in general....
All (this) has made possible the realization
of the postulates of social justice in
spired by the Mexican Constitution.... Con
sequently, Mexico has clearly a political
economy in her constitution, where govern
ment effort is charged with the task of the
Nation's economic development and equitable
distribution of the benefits between the
various sectors of the nation.^2
Basic economic objectives. In keeping with Dr.
Navarrete's statement on national policy, the Calles
administration and subsequent governments have crystal
lized the rationale of government Intervention in econom
ic life with the following three objectives: (1) to exe
cute the projects essential to the economic infrastruc
ture and thereby facilitate and encourage private invest
ment; (2) to supplement private Investment in the
fields In which most private capital Is unable or unwill-
4l
Translated by the writer of this study.
l \ . 2
El Mercado de Valores, Mexico: Su Progreso
Economico y Social (Mexico, D. F.: Naclonal FInanciera,
S. A., June 12, 1 9 6 7). p. 501*
213
ing to participate; and (3) to plan public investments
and encourage coordination with the private sector in cer-
4-3
tain activities. The federal budget and fiscal policy
are not the only current means of activity in the econ
omy, however. The government has taken a more direct
participation through many public enterprises for reasons
of national interest; the most important of these are in
the oil Industry, electric power, and communications.
Carranza1s Legislative, Political,
and Economic Activity.
The years during the Carranza regimes were not
altogether exemplary of political stability, nor did Mex
ico set a definite course towards economic development.
The expropriation of land under Article 27 of the Consti
tution and new taxes on oil output and properties exerted
pressures on the economy. For example, the oil contro
versy was deeply Imbedded with the more underlying issues
of economic development. Too, Carranza's Administration
saw a wave of nationalism and anti-Unlted States attitudes
due to the latter's involvement in Mexico's internal af
fairs and military incidents.
Agrarian reform. The Decree of 1915» the first
agrarian measure, was later incorporated and extended in
^3
Banco Naclonal De Comerclo Exterior, S. A.,
Mexico, D. F., Mexico, 1963., pp. ^0-^1.
21^
the Constitution under Article 2?. Carranza, himself a
large landholder from the North, showed no disposition
to distribute land to the peasants on any large scale.
During his constitutional Presidency, he did little to
provide for the implementation of either the decree of
1915 or Article 2? of the Constitution. The procedure
by which the villages could acquire lands was compli
cated by the Carranza government in that, considering
the Ignorance, poverty, and isolation of the rural peo
ples, few could hope to qualify for receiving it. The
Obregon Administration (1920-192^) simplified the proce
dure and gradually worked out programs for putting into
effect the measures legalized by the Constitution. More-
over, land distribution was gradually accelerated.
Statistical data, though limited during the period, ac
counts for land distribution as is shown in Table 2.
Expropriations and Taxes on Oil. Several decrees
were Issued by Carranza which served as a prelude and the
means to economic growth later initiated by Lazaro Car
denas and subsequent administrations. The measures
brought on a furor of controversy between the government
and foreign enterprises; the mining and oil interests were
Nathan L. Whetten, Rural Mexico (Chicago: The
University of Chicago Press, 1948), pp. 123-124.
215
TABLE 1
TOTAL AREA OF LAND DISTRIBUTED
UNDER AGRARIAN PROGRAM AND
AVERAGE SIZE OF ALLOTMENT
1915-1920
Years
Total No. of
Hectares
Distributed
Total No. of
Persons
Receiving
Land
Average No.
of Hectares
Received
Per Person
1915
— _ _
—
1916 1,246 182 6.8
1917 5,491 1,536 3.6
1918 63,292
14,099 4.5
1919 37,639 14,849 2.5
1920
58,903
15,384 3.8
TOTALS
166.571
46.050 3.6
Source: Nathan L. Whetten, Rural Mexico
(Chicago: The University of Chicago Press, 1948), p. 125.
216
particularly articulate, and none of these events made
it easy for government to administer the laws with dis
patch. The years of social upheaval had made national
government an Ineffective administrative force. It was
not uncommon to learn that the foreign companies, having
little faith in the national government, were recruiting
local armies, for defense, bribing local politicians for
protection, and threatening to call in the Marines if
they were not allowed to carry on in the fashions of the
Diaz Administration.
Not long after his rise to First Chief (December
*+, 191*0, Carranza nationalized the National Railways by
decree, and also provided for the taking over of all tele
graph, telephone, "or other lines of communications sit-
46
uated in the national territory." The provisions at
the time called for government operation of the rail
roads until 1926, when the lines were to be returned to
their owners. Gradually, however, all the railroads
came under government ownership, partly through expropri
ation in 1937 under Cardenas and subsequent government
Vernon, og. clt., p. 66.
46
G. Butler Sherwell, Mexico's Capacity to Pay.
A general analysis of the present International position
of Mexico. Washington, 1929., p. 72.
217
purchases In 1946, and 1950, leaving in private hands
only a few hundred miles of track operated by foreign
47
mining companies and other industrial concerns.
Other decrees followed, and, pressed for reve
nues, President Carranza looked to the growing oil In
dustry for additional taxes. A series of decrees were
Issued, the first of which appeared on April 13, 1917*
taxing crude petroleum, casing-head gas, and by-products
48
by the creation of a special stamp tax. In addition
to a production tax, Carranza sought revenues from "the
right to hold property" (a form of property tax), and
drilling rights as set forth In the decree of February
49
19, 1918, and later amended.
Again a sea of controversy followed. The oil in
terests chose to ignore the law and recruited support to
their claims from the governments of France, England,
and the United States. On August 17* 1918, Carranza
addressed a note to the United States Ambassador in Mex
ico through the Ministry of Foreign Affairs to the effect
that "The Issuance of the tax measures which have been
A j - 7
Cline, o£. clt., pp. 60-61.
48
Government of Mexico, The True Facts About The
Expropriations Of The Oil Companies* Properties in Mexico,
Mexico City, 1940, p"! 28^
^9Ibld. pp. 30-33.
218
referred to was an official act emanating from the legit
imate exercise of the nation's sovereignty— and (this)
Mexican legislation referred to the taxes created by the
decree on oil lands and leases, and to the system of gov
erning real property is authorized, by Article 27 of the
50
Mexican Constitution."
In later years, as an evaluation of the early
controversy, the government report recalled that the Car
ranza Administration never attempted to expropriate pro
perty belonging to aliens because, due to the origin and
nature of the oil and Its legal tradition since the colon
ial period In Mexico, said mineral substance, while re
maining in the subsoil, never had been the property of
51
Individuals or companies. The controversial storm con
tinued, later laced with additional problems of the next
decade forcing the crisis which led to the expropriations
by the Cardenas Administration.
Compromises and adjustments followed during the
Obregon and Calles Administrations, but scarcity of data
during this period limits a more detailed discussion of
this subject. The data shown In Table 2 are abstracted
5°Ibid, p. 36.
^1Ibld, p. 39.
219
from a report by the Association of Producers of Petrol
eum in Mexico on the export of 90,609.000 barrels of oil
during 1927.52
The report indicates that production cost ($20.5
million) included wages and domestic purchases. No men
tion was made whether this figure included capital con
sumption or not. The total production cost ($44.3 mil
lion) was actually the FAS value (Free Along Side) Mex
ican port, and, in an economic sense, the net value add
ed by the Mexican economy. The balance of $69*5 million
did not include transportation cost, since ocean trans
portation was undertaken by steamers owned by the com
panies themselves.
The foregoing discussion on the Carranza Admin
istration in part indicates that the role of government
had not established complete legitimacy among the various
domestic factions prior to Carranza's constitutional
election. And even after 1917. the institutionalization
of government was not fully accepted in the eyes of for
eigners. Article 2? of the Constitution was one of the
foundations of nationalism and economic development--a
fact as yet to be recognized. Thus, the economic role of
government was essentially a passive one.
^2Sherwell, o£. clt. , p. 37.
220
TABLE 2
VALUE OF OIL EXPORTS AND
RELATED DATA, 1927
Deductions, Cost, and Value of
Oil Production
United States'
Dollars
6 Per Cent in Dividends Paid in
Mexico $ 6,818,944.50
15 Per Cent in Taxes 17, 0if7.36l.00
18 Per Cent Actual Production
Costs 20.466.808.00
Total Production Cost in Mexico
$ 44,323.113.50
Calculated Value of Oil Exports
which Stayed Abroad 69.326.962.00
Total Value of Combustible Mineral
Export
$113,649,075.50
Source: Abstract from a Report by the Associa
tion of Producers of Petroleum in Mexico, 1927.
221
Eoonomic conditions, 1910-1920. Dr. Vernon, a
student and friend of Mexico, has made this comment:
"From the available evidence, it appears that the ten
years from 1910 to 1920 were lost years for Mexico, at
least in terms of economic growth. Nobody really knows
what happened in detail, but everybody suspects the
53
worst." Mexico lost considerable resources, human and
natural as well. Agricultural production and domestic
manufacturing was maintained, but at very low levels.
Exports of raw products to industrial markets rendered
much-needed foreign exchange, but not in quantities suf
ficient to supplement the scarcity of domestic foods.
This added to severe inflation and existing economic ills
of the nation.
And, as if to insure economic adversity, famine
became widespread during 1915 as a result of a drought
in the north. The American Red Cross sent many carloads
54
of relief food and clothing. Thus, economic plight was
Intensified by a severe scarcity of food. Official fig
ures suggest, and there is reason to believe they are
53
Vernon, o£. cit., p. 79.
54
^ Clarence Senior, Land Reform and Democracy
(Gainsville: University of Florida Press, 1958), pT 33.
222
correct, that the production of corn declined about for
ty per cent.^ Also, the official production index indi
cates that manufacturing output declined about 25 per
cent during the decade, ^ and minerals followed the same
pattern. The only industry showing any vitality during
this period was petroleum, but the oil economy operated
in such an Isolated enclave, with such limited use of
native manpower and local services, comparatively speak
ing, that the activity could not have done much to buoy
57
the rest of the economy. In retrospect, this economic
vignette on oil might suggest the reason for the action
taken by Carranza and subsequent administrations.
Inflation was encouraged not only by the scarcity
of domestic foods and other materials, but the deficit
spending and fiscal policies of Huerta, and later Carran
za. For an underdeveloped economy, deficit spending, as
a supplement to shortages in government revenues, can be
a deadly measure when capital formation and purchasing
power (labor productivity) are meager.
"^Loredo Goytortua, "Produccion y productlvidad
agricolas," in Mexico, 50 Anos de Revoluclon: La
Economla (Mexico D. F.: Fondo de Cultura Economica,
I960), p. 122.
56
J Ibid. p. 197.
-5?Vernon, o£. clt., p. 79.
223
Carranza inherited the financial ills of Huerta,
but he too created several currency issues. Radical de
preciation was inevitable, and the problem was intensi
fied by the counterfeit paper in circulation. A decree
in 1919 called for fractional currency— coins of light
weight and lesser fineness ( .720) thus commerce be
came almost solely dependent upon metallic money.
Nonetheless, the currency situation and bank re
serves were improved somewhat during 1917-1920 due to sub
stantial gold Inflows as a result of the changed interna
tional conditions occasioned by the World War I in Europe,
and, too, the degree of political stability attained by
Carranza. Consequently, Mexico was able to return to the
gold standard at prerevolutionary parity. (75 centigrams
of gold per peso)Mexico's gold standard was not, how
ever, a gold standard in the full sense of the term. Ex
port of gold, even in metal, was allowed only on condition
of the import of an equal amount in coin, or otherwise by
special permission which was rarely granted.^
-^Joseph Edmund Sterrette and Joseph Stancliffe
Davis, The Fiscal and Economic Conditions of Mexico. A
report submitted to the International Committee of Bankers
on Mexico, May 25. 1928, p. 121.
•^Dwight S. Brothers and Leopoldo Solis, Mexican
Financial Development (Austin: University of Texas Press,
1966), p. 10.
^Osterrette and Davis, op. clt., p. 122.
22k
Slowly, central control of credit and the stock
of money, and the establishment of new banking systems
based on government monopoly, began to take shape after
1917 in accordance with the provisions of the new con
stitution, However, the creation of a new banking sys
tem was still hampered by the shaky economic conditions
of the country, and the distrust of banking and bank
notes which had been instilled in the minds of the public.
Consequently, the Mexican monetary system continued to
be largely dependent upon metallic money until 1925.
during the Calles Administration,
IV. THE CALLES ADMINISTRATION: POLITICAL
UNITY AND ECONOMIC REFORM
Overview of 1920-1934
During the Calles administration, and including
the years Calles dominated the office of the presidency,
Mexico emerged from the destructive aspects of the revo
lution, and attained the beginning of a more solid polit
ical and economic base for subsequent development. The
national and fiscal monetary system was placed under the
control of central government. Monetary reforms Included
^Brothers and Solis, loc. clt.
225
the establishment of a central bank, and the Initiation
of a personal income tax system. Calles also launched
irrigation projects for Mexican farmers and the National
Bank of Agricultural credit, as well as the beginning of
an overall public road program. All these reforms and
monetary measures served as part of the basis for the
establishment of the role of government participation
in the development process as later furthered by Presi
dent Cardenas.
Plutarco Elias Calles was a man of humble origin
whose early career gave little promise of future prom
inence. He was born in Guaymas, the state of Sonora. In
his youth he had been a bartender and later a school
teacher before joining Obregon's forces in support of
62
Carranza. As President, and president-maker, many of
his policies sought to realize the revolutionary goals.
However, his determination to maintain supremacy, as the
man behind the scenes after his term of office in 1928,
cast a shadow upon his historical image. Nonetheless,
his role in developing the modern Mexican economy should
not be minimized. Calles was one of the builders of the
modern role of government, and he remains a formidable
62
Johnson, op. pit., p. 137*
226
figure who made a positive contribution to the existing
system, including the single-party political system.
The Calles Administration
An earlier section of this study indicated the
slow economic development experienced after 1917- Mexico
had been strapped with losses and severe damages caused
by the civil war. Tax collections were meager. In
ternal capital sources were sparce and poorly organized,
and people with substantial capital were generally skep
tical of the new regime. The rate of growth of national
income had declined in 1910-1920 to 0.7 per cent as com
pared with 2.9 per cent yearly in 1895-1910. However,
at the end of the Calles regime (1928), the national in
come had risen to an average of 1.7 per cent yearly
(1921-1928) ,6^
The following is a synthesis of Calles1s sig
nificant accomplishments:^ (1) The national and fiscal
monetary system was put firmly in the hands of central
government, which established the central Bank of Mexico
to resolve the difference outstanding on Mexico^ ex
ternal debt; control the stock of money; promote sounder
^Padgett, ojo. cit., p. 29.
6A
Robert J. Shafer, Mexico: Mutual Adjustment
Planning (New York: Syracuse Univ. Press, i960), p. ifO.
°5Brandenburg, ojo. cit.. p. 125-
2 27
taxation; and establish a general controller's office
for overseeing national budgetary matters. (2) Calles
re-established the semblance of financial security,
which existed during the Diaz regime. (3) He launched
a program of public roads under a new agency, the Nation
al Road Commission. (4) Irrigation projects for Mexican
farmers were started under the direction of the National
Irrigation Commission. (5) The electric power Industry
became subject to strict government regulations with the
passage of the National Electricity Code. (6) The need
for financing agriculture led to the founding of a Na
tional Bank of Agricultural Credit. (7) Definite steps
were taken to professionalize the army and to reduce Its
size and Influence.
Economic Planning. Several writers suggest that
until recently Mexico has undertaken economic develop
ment without the benefit of comprehensive national plan
ning. Robert Scott cites the concentration of authority
in the presidency. The chief executive has controlled
the bureaucratic machinery carrying on the detailed, day-
to-day work of government. Not even a strong man such
as Calles could apply himself to every detail of public
66
expenditures and make the necessary economic decisions.
66
Scott, ojd. cit., p. 125-
228
The government administrative process had to be institu
tionalized before an effective program could be initiated,
unincumbered by administrative whims of the President.
A leading Mexican economist, Miguel S. Wionczek,
has reflected that the Plan Sexenal (Six-Year Plan), in
itiated under the Influence of Calles in 1933» was an
economic plan in name only. Other writers, such as
Sanford Mosk and Howard P. Cline, have concluded that
Mexican development was planless. And, "apart from
election campaigns," said Bretran M. Gross, "interest
in formal and comprehensive planning does not seem to
have been revived until 1962, when the government was
seriously concerned over the temporary economic slow-
68
down." If, however, Mexican progress has not been
the effect of planned action to achieve macroeconomic
targets, it nevertheless cannot be disassociated from
a long series of more specific goals (selected priori
ties) toward which the Mexican government has been un-
equivocably committed over the past three decades . 7 But
it Is of Interest, nonetheless, that the desire for plan
ning was prevalent as early as the Calles administration.
6 7
'Cf., Everett E. Hagen, (ed.), Planning Economic
Development (Homewood, Illinois: Richard D. Irwin, Inc.,
1963). p. 150.
68Shafer, o£. cit., p. XI.69Ibid., pp. XIII-XIV.
229
In 1928, the government created a National Economic
Council which was given a broad mandate to study and
consult with the government. Apparently, it accomplished
nothing. Then in 1930 a National Planning Law was pas
sed. It provided for a consulting body, the National
Planning Commission, which was to be established in the
Ministry of Communications and Public Works. This Com
mission did not function either. It was reorganized in
19^1f and dissolved in June, 19^2.^°
Taxes and Tax Exemptions. Slowly, the structure
of public finance has changed drastically since 1910.
From a system in which regressive, Indirect taxes sup
plied virtually all public revenues, the government in
come base has come to rest on foundations of progress
ive and direct taxes, loan placement, return on invest
ments, operating profits from public enterprises, and
fees. The success of this change was, of course, as a
result in the rise of national income and the ability of
the economy to pay taxes. But during the Calles admin
istration (and the 1930*s) Indirect taxes— largely from
customs and tax stamps— were still supplying nearly 85
71
per cent of total revenue.
7°Ibid.. pp. iJ-2-43.
71
r Brandenburg, o£. cit.. p. 218.
230
Calles embarked on an effort to promote indus
trial development by means of tax exemptions. In a
decree issued in 1926, only a restricted number of firms,
however, qualified. Later administrations enacted laws
providing exemptions to firms with larger capitallza-
72
tion and a system of classifications. Ineffective as
this measure proved, it was Calles* way of promoting
small local industries.
Financial Development. Several important credit
institutions were created by Calles. The most signifi
cant step was the establishment of the Banco de Mexico,
S.A., called for in the Constitution of 1917. This
measure has a background stemming from the Diaz regime,
when private banks Issued their own currency and were
deeply enmeshed in the web of special exemptions, rights,
73
and privileges. Moreover, the revolutionary years
witnessed severe inflationary pressures due in part to
72
' Sanford A. Mosk, Industrial Revolution in Mexico
(Berkeley: University of California Press, 1950)» P» 63.
73
^Raymond Vernon (ed.), Public Policy and Private
Enterprise in Mexico (Cambridge, Massachusetts: Harvard
University Press, 1964), p. 131.
231
monetary disorders. Revolutionary opinion rejected the
right of private banks to create money (bank notes) be
cause it permitted those Institutions, "with no compen
sation to the state, to enjoy a monopoly in the issuance
of notes in greater quantities than the sum of their
74
metallic reserves." Thus, the government assumed the
sole right to issue paper money under the authority in
Article 28 of the Constitution which conferred the right
to issue paper currency on a single bank to be establish-
7 * 5
ed and controlled by the Federal government. ^
But while the Banco de Mexico was granted author
ity to act as the central bank beginning in 1925» it was
unable to gain Immediate control over either the money
supply or private commercial banks because of the initial
period of financial impotence. The immediate powers in
cluded the issuance of paper money, authority to estab
lish exchange rates between the peso and foreign cur
rencies, to manage the nation*s gold standard, and to act
as a bank of rediscount for commercial paper. Commer
cial banks were authorized to receive demand deposits
74
Antonio Manero, La Reforma Bancarla en la Revo-
luclon Constltuclonallsta (Mexico; Talleres Graficos
de la Naclon, 1958), p. 88.
^-Vernon, op. cit., p. 13*K
232
and lend at shortterm. But private banks were at this
time neither required to Join the new system headed by
the Banco de Mexico nor to submit to its regulation.
And they had no cause for alarm. Private bankers were
still more concerned with pursuing their own interest
and avoiding the public sector than they were with na-
7 6
tional betterment.'
The Banco Nacional de Credito Agricola y Ganadero
(Agrarian Credit Bank) was established by the govern
ment in 1926 to initiate a national system of agricul
tural credit. This was a measure to modify the opera
tions of the money markets to a degree greater than per
mitted by sole reliance on a central bank alone. But
this credit institution came under criticism during the
1930's. Operating under "pure" banking principles, the
bank was unprepared to meet the conventional needs of
peasant farmers with particular requirements of the
e.lido system, where conventional guarantees were not
available due to the legal inalienability of ejldo lands.
In other words, the bank favored safer, more conventional
77 / #
credit to private landowners.'' In 1935. Lazaro Cardenas
?6Ibid., pp. 13^-137.
77
''William P. Glade, Jr., and Charles W. Anderson,
The Political Economy of Mexico (Madison: University of
Wisconsin Press, 1963), p. 122.
233
created the Banco Nacional de Credito Ejital (Ejldo
Credit Bank) to fill the above need.
Other credit institutions were created during the
administrations of the three presidents (1928-1934) who
were under the Influence of Plutarco Calles. The fol
lowing list Includes the national institutions created
during that period:7® (l) Banco de Mexico (1925); (2)
National Agricultural Credit Bank (1926); (3) National
Urban Mortgage and Credit Public Works Bank (1933); and
(if) Nacional Flnanciera (April, 193*0 •
Social Overhead Capital. In keeping with goals
for advancement, Calles launched a road-building pro
gram, setting a precedent for Mexico's relatively modern
and constantly expanding highway network. The growth
of the road system has been notable and sharply rising
since 1940. In 1925, however, there were only about
700 kilometres of passable roads, and In 1939 less than
10.000,79 (as compared with 40,000 kilometres in I960).
The Banco Urbano y de Obras Publicas (Public Works Bank)
was designed to serve as a financial institution for
7®Brothers and Solis, o£. cit., p. 17.
7 9
' 7C lin e , o£. c i t ., p. 64.
23^
public works projects in highways, sewage systems, and
»
drinking water. (Since 1950* however, emphasis has been
8 0
placed on public housing.)
Irrigation had its serious beginning with the
1926 Irrigation Law, when the National Irrigation Com
mission was created, and set up in the Ministry of Agri
culture and Development. But development was slow. In
fact, from 1925 until 19^8, irrigation was piecemeal
among the various sectors of Mexico. (In 19^8, President
Aleman raised the Irrigation Commission to cabinet rank
as the Ministry of Hydraulic Resources, charged with the
task of Irrigation, building of dams, and flood control.iP"
The quest for cheap electric power has been one
of the important public issues in Mexico. Owned by Ca
nadian, British, and American interests for about seventy
years, the power industry has provided a battleground
in which interests of the private sector and govern
ment have continually met, clashed, and found basis for
compromise. The new technicos (entrepreneurs, economists,
and public administrators) pushed for reform for the fol-
8 2
lowing reasons: (1) Electric rates were considered
8 0
Glade and Anderson, op. cit., p. 188.
^Cline, o£. cit., pp. 68-69.
Vernon, oj3. cit.. p.
235
exorbitant; (2) despite all the secrecy surrounding
company records, the disparity between prices paid by
large and small consumers had become widely known; and,
(3) the owners of the industry were foreigners who re
putedly reaped large profits from their operations, and
in addition, had easy access to external financial re
sources .
Calles also faced a new force pressing for re
form. This force consisted mainly of small industrial
ists and merchants who considered electricity prices un
reasonably high. Thus Calles adopted in 1926 the Co'dico
Nacional Electrlco (National Electrical Code). It called
for regulations and control of electric power by govern
ment in the interest of the nation. The industry was
to be considered a "public utility." The provisions in
cluded a series of technical rules of industry’s opera
tion. Among these, the erratic supply of power, trans
mission facilities which were dangerous to the lives of
workers, and faulty meters installed on client’s prem
ises were all to be improved. A new storm arose. But
years later (I960) the industry was happy to sell all
its holdings to the Mexican government; thus electric
power was finally nationalized
83Ibid.. p. 91.
Economic Conditions. 1920-193^-
The account presented thus far suggests that dur
ing this period in question economic growth was slow In
deed. Table 3 Indicates the peaks and dips during
1929 to 193^. Manufacturing expanded at a swift rate;
it was the sector with the greatest growth. Related in
dustries, such as petroleum and electric power, kept pace
with industrial development. Similarly, commerce and
finance showed impressive development. On the whole,
however, agriculture declined proportionate to national
income. Government expansion of the economy*s infra
structure set the stage for meeting the demands of the
World War II years.
But Mexico also faced monetary problems during
the period under discussion, in part, for the following
reasons: The Banco de Mexico had been granted (1925)
statutory authority to act as a central bank; however,
it was unable at that time to gain immediate control
over the money supply. It was not until 1931 that the
central bank was able to exercise much influence except
in so far as its competition with private commercial
8k
banks affected their behavior.
8^
Brothers and Solis, oj). oit. t p. 10.
237
TABLE 3
ESTIMATED NATIONAL INCOME OF MEXICO,
1929-1934
(Millions of Pesos)
Economic
Activity
1929 1930
1931
1932
1933
1934
Agriculture
393 325 295
278
317 319
Stockraising 224 206
171 145
138 163
Fishing
5 5
4 4
3
6
Forestry
Mining and Metal
50
47 43
41 61 154
lurgy 372 356 262 205
311 413
Petroleum 80
71
68 66
79
110
Manufacturing0, 336
315
386 278
329
444
Commerce and Finance 480
503
498 476 641 718
Building Construction
185
180 172 170
179
196
Transportation
Government Services
137
130 121 108 122
137
and Public Works 321 322 281 270 288 316
Domestic Services
Entertainment, Pro
fessional, and Other
110 108 106 108
119
126
Services 142
133
130 128
135
148
TOTALS 2
V\
CO
*
2,701
2,437 2,277
2,722 3,250
Source: Sanford A, Mosk, Industrial Revolution
in Mexico (Berkeley: University of California Press, 1950),
PP. 314-315.
aExcludlng Motion Pictures,
238
The depression caused further difficulties. De
clines in commodity prices in 1930 and 1931 brought the
usual financial consequences, and, by mid-1931» Mexico
was forced to officially abandon the gold standard.
Ley Monetarla (Calles* Law) was adopted in July 1931-
It stipulated that the gold parity of the peso was to
remain unchanged (75 centigrams). Gold was demonetized,
but would continue to be used to settle international
accounts. Moreover, Ley Monetarla allowed the central
bank control over the country's monetary reserves. Thus,
in response to worsening economic conditions attributed
in part to the depression in the United States and else
where, the Banco de Mexico moved in 1932 to halt the de
cline in money supply and internal price levels. A sub
stantial volume of notes was issued on the basis of
silver, and the rate of exchange was forced downward by
means of sizeable purchases of dollars.8- ^ Thus, the
Banco de Mexico began to operate as a central bank.
V . THE CARDENAS ADMINISTRATION
Lazaro Cardenas was b o m and reared in the village
of Jiquilpan, in the state of Michoacan. His family
85Ibld., p. 1 1 .
239
owned a small corn field and a horse. At the age of
twelve, when his father died, he became the chief sup
port of his mother and seven sisters and brothers. From
early life, therefore, he was attracted to the economic
plight of the peasantry. And when he ran for the presi
dency, the masses knew that at one time or another he
had fought under Zapata, Carranza, Obregon, and Calles;
that by 1920, at the age of 25, he was brigadier general
and governor of Michoacan, earning a reputation for in
tegrity, industriousness, and support of agrarian re
form.86
Calles was determined to maintain political con
trol of government. In order to balance the factions
from the left and the right, he was compelled to choose
the mild mannered Cardenas to run for the presidency.
Cardenas was thought to possess a weaker personality than
the other candidates. This was an error on the part of
Calles, and eventually made for his political undoing.
But Inasmuch as he was hand-picked by the .1efe maxlmo.
Cardenas was very popular himself, as a soldier, a poli
tician, and as a man of integrity; and during his presi
dential campaign in 193^, Cardenas travelled throughout
, •, p • 81.
2k0
the entire country, even to remote areas state governors
had never visited. He talked and listened to peasant
problems and needs.
It was Inevitable that Cardenas would be elected,
but Calles did not anticipate the overwhelming support
of the vast peasantry, greatful that the presidential
candidate came to hear them, and upon whom they placed
their trust to Improve their economic conditions. His
visits to the common folk of Mexico did not end with his
election. During his administration Cardenas spent a
good deal of his time travelling all over the country
inspecting federal projects, asking questions, and lis
tening.
In addition to his personality and convictions,
Cardenas became a strong president from two related
factors. First, the politically awakening masses knew
and identified with him because Cardenas had a large
capacity for empathy for his fellow man. After elec
tion his popular support increased because it became
clear that he, in turn, could Identify with the common
people. Cardenas was more a "National" president than
any other of his revolutionary predecessors. The second
factor lay in the fact that in Cardenas the myth of the
Mexican Revolution came to life. Since he Identified
2^1
with the people and their problems, the young presi
dent (AO years old) sought to turn the phrase of the
revolutionary reform into reality, and the public soon
learned that it could measure his sincerity not simply
O nr
in words, but in deeds. (
Mexican conservatives, and outsiders labeled
Cardenas a radical. It was not surprising, because of
Cardenas* tenacity and zeal to accomplish the goals of
the revolution— too speedily perhaps. Rapid implemen
tation of social and economic change often promotes severe
reaction, particularly by those who are affected adver
sely by such changes. Land distribution and oil expro
priations may seem the acts of an angry man, but only
ftft
if taken out of the context in which they occurred.
But Cardenas, the man, was more of a moderate than a
radical. The moderate and conciliatory efforts with
which he attempted to solve the problems of church-state
relations, after Calles* intransigent anti-clericalism,
is one among several cases in point.
At the beginning of the Cardenas administration,
Plutarco Calles was still jefe maximo. The new regime
^Scott, 0£. clt.. pp. 1 2 6-1 2 7.
88Ibld.
2k2
had a Calles-approved cabinet, and no doubt Cardenas in
tended to go along with this arrangement as long as
Calles was sincere about reform. The President was con
vinced that survival of revolutionary Mexico depended on
keeping faith with the masses. With this philosophy in
mind, Cardenas proceeded to end waste and political ob
struction. He began by closing the gambling casinos
and moving the presidential residence from the palaclal
Chepultepec Castle to modest quarters at "Los Pinos."
He dismissed or reassigned all predatory militarists.
The rank and file of organized labor deserved better
standards of living, he felt, and, therefore, he condoned
strikes. His agrarian reform stepped up land distribu
tion, but the courts were packed with Calles* judges, and
not unlikely they would uphold agrarian reform. Cardenas,
therefore, rescinded the law prohibiting the executive
from removing federal judges, then removed all of them
89
and appointed his own slate.
Calles was very displeased. Intent on retaining
control of government, he openly denounced the adminis
tration* s liberal policy, together with a thinly veiled
threat against the president himself. That was another
89
Brandenburg, o£. clt., pp. 77-78.
2 IB
mistake. Cardenas knew by then that Calles was the
greatest obstacle in the way of effective reform. With
the shrewd political Instinct of a Benito Juarez, Car
denas took his program directly to the people, travel
ling without military escort to remote villages, by
go
car and horseback/ Moreover, the unions, the Proletar
ian Defense Committee, and the bureaucrats rallied to
his side. Then one day, on June 19» 1935» Cardenas dis
solved the Calles cabinet and replaced it with one firmly
committed to economic reform. At the same time, without
warning, Calles and his strong-man union leader, Luis
Marones, found themselves unceremoniously packed and de
posited by government plane in Brownsville, Texas. The
ousting of Calles was the most spectacular feat of po
litical engineering (without bloodshed) that Mexico had
91
ever seen. It demonstrated to anyone who might need
further convincing that Lazaro Cardenas was President of
Mexico and master of the political situation.
The Agrarian Reform
The agrarian economy of Mexico has long suffered
from problems common to underdeveloped nations too large
90
Scott, 0]D. cit., p. 129.
^Simpson, ojd. cit., pp. 287-288.
2 hh
in their rural population for the amount of arable land
available. Too, real income had been difficult to raise
to levels much above subsistence, and economic improve
ments had been slow in materializing due in part to the
rigidities peculiar to traditional societies. Paro
chial attitudes, or localism, had prevented the peasantry
and Indians from effectively adopting modern agricul
tural methods and, until recently, there has been a marked
absence in political participation. The organization
of agricultural workers into unions, and the incorpora
tion of the Farm Sector into the single-party system,
have brought more rural people into national politics.
Both groups were encouraged by President Cardenas.
In comparison with his predecessors, Calles dis
tributed a fair amount of land durlng.hls administra
tion (see Table U ). He was, however, a firm believer
in the institution of private property, and he regarded
the ejido as a training ground which should be encouraged
for the purpose of developing a nation of peasant pro
prietors. Calles enacted laws which would permit crop
lands belonging to the ejldos to be divided into plots
among the individual members. President Cardenas, on
the other hand, was convinced that the ejido must become
a fundamental part of the national economy, and he pro-
245
TABLE 4
TOTAL AREA OF LAND DISTRIBUTED UNDER THE
AGRARIAN PROGRAM AND AVERAGE SIZE
OF ALLOTMENT, 1921-19i»'0
Year
Total No. of
Hectares
Distributed
Total No. of
Persons Re
ceiving Land
Average No. of
Hectares Receiv
ed Per Person
1921 173,307
25,268
6.9
1922
113.157 14,629 7.7
1923 257,5^7 30,319 8.5
1924 580,661 64,081
9.1
1925 723.957 78,837
9.2
1926
758,055
76.728
9.9
1927 888,917
81,234
10.9
1928 608,949
60,155
10.1
1929
1,003,124 103,654
9.7
1930 697,124
65,655
10.6
1931
600,986 43,792
13.7
1932
3^0,075 20,729
16.4
1933 188,889 16,733 11.3
193^ 676,037 55.271
12.2
1935
2,900,226
178,995
16.2
1936
3,303.787
198,178
16.7
1937
5,016,321
184,457
27.2
1938 3,206,772 115,014
27.9
1939
1,7^6,890
65,957 26.5
1940
1,716,581 71,818
23.9
TOTAL 25,501,362 1,732,062 16.4
Source: Nathan L. Whetten, Rural Mexico
(Chicago: University of Chicago Press, 1948), p. 125.
2U6
ceeded to expropriate and redistribute some of the most
highly developed farming areas in Mexico. These com
prised, among others, the famous cotton-producing areas
92
of the Laguna region, consisting of 447,516 hectares.7
Land distribution (under the influence of Calles) paled
considerably during the early 1930*s (see Table 4 ),
reaching a low ebb in 1933. when President Rodrigues
(1932-1934) passed the Agrarian Code of 1934, a law that
not only synthesized the previous laws, but also made
contributions with some limitations. The Code abolished
the political status criterion of eligibility to peti
tion for land. The only remaining requirement was that
the group be a center of population (village), which also
included the peons living on the haciendas. The peons,
however, were not made unconditionally eligible, nor did
the new law provide for breaking up haciendas. These
limitations were abolished by President Cardenas in
1937. and the peons were automatically made eligible for
93
land distribution.
Two other reforms should be mentioned which took
✓
place in 1942 during the Avila Camacho Administration,
President Cardenas' successor. (1) The Agrarian Code
92Whetten, op. cit., p. 124 and 128.
93Ibid.. pp. 132-133.
2k7
was revised, to guarantee the "inalienability of stock-
breeding estates, with the purpose of protecting the
country*s stock-breeding industry, which was declining
because the large ranch owners would not expand their
undertakings for fear of losing the capital Invested
in livestock if their lands were affected by redistri
bution. (2) The movement for agrarian reform included
labor legislation. Article 123 of the Constitution regu
lated the relation between the worker and employer, in
cluding agricultural workers, and set the minimum wage
limits.^
Land Distribution and the Six-Year Plan. Presi
dent Cardenas Inherited the Six-Year Plan adopted under
the influence of Calles, but the plan did not provide
practical tools for its implementation. This is under
standable. In those days Mexico did not have any eco
nomic or statistical agencies that could undertake the
studies necessary to translate the plan's general in
structions into quantitative terms. It was not until
the I960*s that Mexico had developed effective research
agencies and the improvement of technical knowledge es
sential for macroeconomic planning. The Six-Year Plan
oI l
Tuma, op. cit., p. 120.
248
was merely an enunciation of policy, and was not based
on any degree of prior planning. The text of the Plan
stated many "Policy Objectives," such as government aid
to agriculture, promotion of crops, erection of irri-
o<
gatlon works, et cetera.^ But one would assume that
96
policymaking may have preceded the formulation of plans.
This, however, was not the case. Moreover, the Plan
Itself did not discuss matters in quantitative terms:
of production, construction, chronological goals, speci
fic data on financing, and the attention to modes of ex-
97
ecution expected in planning today. There was an edu
cational feature to the Plan, however. Through the prac
tical difficulties they encountered, President Cardenas
and subsequent administrators became aware of the prac
tical importance of formal and disciplined planning— a
task begun in recent years.
Prior to Cardenas* administration, land was secu
red by nibbling at the edges of large estates. Most of
the areas distributed were poor land, badly located from
the standpoint of either selling products (when sur-
9 - ^ S h a f e r , o j d . cit., p. 44.
96
^ John E. Elliott, "Economic Planning Reconsidered,"
The Quarterly Journal of Economics. February, 1958» P. 59.
^Shafer, loc. cit.
2^9
pluses were realized), or procuring supplies. Moreover,
sufficient credit was not available, and no truly ade
quate attempt was made to educate the peasants in better
agricultural methods.
President Cardenas made possible the expropria
tion of large haciendas and estates, thus making for a
distribution of land at a rate never witnessed during
the previous twenty years, when 8.3 million hectares
were distributed. At the end of the Cardenas Adminis
tration, 18.6 million additional hectares were alloca
ted to the ejldos (Table 5 presents the yearly distri
bution, 193^-19^0). In other words, the President was
responsible for 70 per cent of the total land distri-
98
bution program up to his time.
Land reform reached many areas of Mexico, cover
ing the cotton-producing Laguna region, the states of
Durango and Coahuila; the sugar-producing regions of
Sinaloa and Tamaullpas; the wheat and rice areas of the
Yaqul Valley in Sonora; the coffee plantations in
southern Chiapas; the cotton and wheat area of Mexicali
Valley in Baja California Norte; the henequen region of
Yucatan; and the rice, cattle, and lime plantations of
98
Mosk, op. cit., p. 53-
TABLE 5
GROSS NATIONAL PRODUCT
(Millions of Pesos)
Economic Activity
1935
1936
1937 1938 1939
1940
Agriculture 361 472
535
546
625
548
Stockraising 212 214 268 302 332 344
Fishing 6 8
9
12
19 31
Forestry 56 54
47
58 74 70
Mining and Metallurgy
551
552 658 750 819
862
Petroleum 119 117 156 134
157
161
Manufacturinga 605 813 986 1,118 1,424 1,648
Commerce and Finance 790 862
945 997 1,143
1,420
Building Construction 228 256 298
331 385 435
Transportation
153 171
190
215 233
262
Government Services
and Public Works 340 410 458 478
523 556
Domestic Services 130 143
162 168
175
220
Entertainment, Professional,
and Other Services
163
181 203 214 230
245
TOTALS 3,714
4,253
5,006
5,323 6,139
6,802
Source: Sanford A. Mosk, Industrial Revolution in Mexico 1 (Univ. of
1
Calif. Press).
aExcluding Motion PicturesT
2S0
251
99
Lombordia and Nueva Italia in Michoacan.
Such large land distributions would most surely
require large-scale financing in order to aid the pea
santry in land improvements, tools, and other essentials.
To this end, President Cardenas established the Banco
de Cre'dlto Ejidal in 1935 (The Ejldo Credit Bank). Le
gally, the bank is an autonomous corporation. It makes
two classes of loans, and helps the credit societies
arrange for a third. (1) Avlo loans are short-term, no
longer than eighteen months, and are made to keep the
local credit societies going during land preparation,
cultivation, and harvesting. The loan may be made up
to 70 per cent of the expected value of the crop, and
must be paid with the proceeds of that crop; (2) Re-
facclonarlo loans run from one to five years, and are
used to finance preparation of new lands, the purchase
of farm machinery, work animals, fertilizer, and other
goods. These loans are repaid In annual installments;
and, (3) Inmoblllario loans are made for long-range pur
poses, such as permanent Improvements. An Interest rate
of 8 per cent is high as compared with those charged in
the United States. But private agricultural credit in
^^Whetten, op. cit.. p. 128.
252
Mexico brings interest of 12 per cent at least."*"00
Establishing the EJido Credit Bank was a part of
the agrarian development. Once credit became available
to the ejidos, its use necessarily demanded other as
sistance. To this end the President initiated a tech
nical assistance program in the form of advice on all
phases of farming operations. Experts were sent to the
ejidos to give counsel on crop planning, seed selection,
and methods of tillage and marketing.
One of the outstanding features of President
Cardenas' agrarian program was the development of the
collectivized ejido. The best known and most signifi
cant took place in the Laguna region (States of Durango
and Coahuila). Large estates dominated the area, one
of the better land areas in Mexico. Methods of large-
scale farming were employed with cotton as the principal
crop. However, the men who worked the land, whether
renters, sharecroppers, or wage earners, were essentially
peons in the pre-revolutionary sense. Agitation for re
form had not been lacking but no headway was made until
Cardenas. Critics reported that the powerful haciendados
" L00Senior, op. cit., pp. 100-101.
253
had considerable political influence in government
The peasants kept up the agitation for land distribu
tion. Then a new situation developed. The peasants
were organized into a labor union. Strikes were answered
by discharges, evictions, and arrests. The union demanded
collective bargaining contracts, increases in wages to
1.50 pesos (42 cents) a day, reduction of hours to eight
per day, and the right to name a checker when cotton de-
102
llvered by the peasants was being weighed.
The President made conciliatory efforts but with
out success. A famous decree followed. On October 6,
1936, the President signed the expropriation of about
three-fourths of the Irrigated land, and one-fourth of
the nonirrigated usable land in the region. The land
was turned over to approximately 30,000 peasants organi
zed into about 300 collective ejidos. The collectiviza
tion was made for several reasons. Water supply was
erratic. If individual holdings were established, it
would have been difficult to guarantee equitable distri
bution of irrigation water since the net worth of canals
101
For Instance, Clarence Senior cites the contri
bution of 100,000 pesos ($>50,000) made by the landowners
towards Plutarco Calles* presidential campaign In 1924.
A similar purse was offered Cardenas In 193^* tut he re
fused it.
1 o?
Senior, o~p. cit., p. 6 5.
25U
were available to large units. Also, cotton was based
on the economics of large-scale production, with modem
103
farm equipment already developed in the area.
The collective ejidos have not attained the pro
ductivity of the private cotton producers. During the
period from 1937 to 1943* private producers obtained a
yield of from 2.0 to 2.35 bales per hectare, while the
collective ejidos show a yield from 0.93 to 1.51 bales
104
per hectare. From reports covering cotton production
by the ejidos during the 1950*s. this writer has compu
ted the yearly yield, revealing the highest to be 1.71
bales per hectare. These figures seem to indicate that
large units are in the position to reach optimum output
through the economies available to them, thus effective
ly combating the problem of diminishing returns.
Political and Economic Participation
The single-party system is a unique social in
stitution in Mexico, in spite of its shortcomings— strong
centralized power, restraints of full expression by par
ticipants, control of officials, not only at federal
levels, but at state and local levels. Nonetheless, the
^-^Mosk, op. cit., pp. 56-57*
104
Whetten, op. cit., p. 232.
255
very nature of its shortcomings explains the need for
such political mechanisms. This was particularly true
at the time of its Inception and during the Cardenas
Administration. Without such political organization
the country would have remained under the old political
malignancy she suffered since her independence (with the
exceptions of Juarez and Diaz regimes).
An election or a military coup would mean a
counter-revolution and ad infinitum. The status quo,
selfish politicians, and ambitious caudlllos maintained
political conditions in a turmoil in their efforts to
maintain power or acquire power, or plunder--all in the
name of Mexico. Meanwhile, political stability in the
country would be nil, and any long-term effort toward
economic development would be impossible. Also, social
erruptions and counter-revolutions meant the loss of
assets and reduction in the level of capital formation,
the loss of human resources, and the curtailment of na
tional production which could never be recaptured.
Calles and the PNR. The genesis of the single
party system occurred at the end of the Calles Adminis
tration, but, paradoxically, not for lofty purposes en
tirely as one might expect. With his administration
coming to an end in 1928, Calles sought a means by which
256
he could control the political machinery and exercise
political Influence over the local party men and caudil-
los. Under such a system, Calles felt he could control
the federal government. In other ■words, he remained
the .1efe supremo, the strong man.
The party was not, however, highly centralized.
Instead, It was a coalition of local political machines
and of various agricultural, labor, and other interest
associations, including the silent but ever-present
military caudillos. Internal quarrels within the party
were not uncommon, as many of the party bosses would not
surrender all of their power to Calles. But Calles
attained a high degree of success, as evidenced In his
control of three part-time presidents. From this coali
tion of political interests and unity, the country in
turn received the stability long needed for investments
and growth.
Calles also became a successful businessman, un
derstandably, along with other military generals. All
of them became more conservative, and retired more and
more from the realities of Mexico. Calles grew more
remote from the newer trends and social dynamics. The
impact of the world depression seemed to have brought
the revolution to a standstill by 1933• Agrarian reform
257
about stopped. Then Calles chose Lazaro Cardenas to
run for the presidency.
The Cardenas Reform and the PRM. During the
first two years of office, President Ca'rdenas sought to
increase the political participation into the PNR
(Partido Nacional Revoluclonario). He attracted workers
and peasants on the basis of alliance with their trade
unions, including the members of ejldo communities. By
1936, the PNR had a membership of about a million mem
bers. The President also sought to formalize relation
ships among various organizations and interests, both
in side and outside the PNR which had supported his ad
ministration. For a time, he tried to establish a Popu
lar Front similar to the one in France, but nothing came
of it. Finally in December of 1937» the President called
for the dissolution of the PNR and formation of a new
revolutionary party.
The new PRM (Partido de la Revoluclon Mexicana)
took as its organizational basis a corporate structure
embracing the diverse Interest which supported President
Cardenas* version of the revolution. The party's cor
porate structure divided organized political activity
into four functionally based "sectors"— agriculture,
10^Scott, o£. cit., pp. 127-130.
2$6
labor, popular, and military. These sectors coordinated
at the national, state, and local levels by committees
on which each was represented. The significant feature
of the new system, as distinct from the PNR, was that
through caucus or presidential order, all offices were
allocated by sectors, and the sole candidate was support
ed by the other three sectors. This system extended from
congressional to municipal elections. The designation
of candidates rested almost completely with the Presi
dent. (Today, the President has full control.) He might
consult with the National Executive Committee, who in
turn solicited advice from the lower and local echelons--
but the final decision was the President's, as national
political boss.^*^
The official party was given a new name, the PHI
(Partido Revoluclonario Institucional), and the military
sector was dropped in 19^5 during the Avila Camacho Ad
ministration. The general membership was changed to three
basic sectors--the farm, labor, and popular. The latter
sector has continued to grow rapidly, attracting lawyers,
intellectuals, and independent farmers.^0' ' 7
106Cllne, o j d • cjLJt • , p . 152.
10^Vernon, 035. cit., pp. 129-130.
259
The financial, commercial, and Industrial groups
have their own organizations, and although they are not
provided with access to government counsel through the
PBI*s sectors, they consult with the president on their
needs and on matters concerning proposed changes in ad
ministrative regulation, and new legislation which affect
their particular interests. Moreover, the Mexican Bank
er^ Association, a private business organization, now
elects representatives to various governmental fiscal
agencies such as the National Securities Commission. It
is noteworthy that the National Banking Commission con
sults the Banker*s Association regularly on economic and
i nfl
fiscal matters. Liberals and other groups claim that
the President*s ear, in fact, has been too accessible
to large business organizations and foreign enterprises
while neglecting more pressing domestic needs, such as
agriculture and small business enterprises. This cri
ticism was directed particularly to the Aleman Adminis
tration (19^6-1952).
Thus, the political evolution— the wider partici
pation of the various interests and factions in the po
litical process, the Institutionalization of govern
■^^Scott, op>. cit., pp. 28^-285.
260
ment, and the peaceful presidential succession— have
made for the political stability essential for economic
development. Too, this political evolution has clearly
defined the role government is to exercise in the develop
mental process of the nation. Foreigners often marvel
at the rapid (but structured) growth Mexico has attained
during the last thirty years, but deplore the "undemo
cratic" single-party system. And while there may be
some merit to their criticism, the economic growth they
praise would hardly have been realized under the condi
tions too well revealed in the social, political, and
economic history of Mexico of the last fifty years.
Economic Conditions and Policies
Under Cardenas
The Cardenas Administration came to power at a
time when the country had been slowly recovering from
the effects of world depression. Mexico*s exports had
dropped significantly from 1929 to 1933 as the world de
mand for metals declined. A sizeable amount of trade
had been with the United States. In keeping with the
international policies of the day, the peso was devalu
ated from about 40 cents to 28 cents in United States*
109
dollars. 7 This measure may have stimulated domestic
■'■^emon, op. cit., pp. 84-85*
261
manufacturing as imports became more costly. All types
of products increased In output, not only the old stand
bys, such as textiles, beer, sugar, shoes, soap, and
tobacco, but also newer products, such as cement, and
iron and steel. The extensive public works program
launched by Cardenas, along with inflation, had demand-
stimulating effects. Increases in the marginal effic
iency of Investment spurred young industrialists to
opportunities offered by public contracts, thereby stimu
lating Investments in new ventures in the private sec-
tor.110
It is said that President Cardenas brought to
positions of influence economic advisors oriented to
Keynesian principles. To be sure, the Presidents early
deficit spending policies may have had stimulating effects
in urban centers plagued with Idle capacity, but his
large deficits toward the end of his administration would
hardly have had macroeconomic stimulus on the economy.
Evidence supports that inflation in this period did not
materialize the desired net investments. For one thing,
1 1 0Ibld.
262
the Presidents well-meant (and needed) public expendi
tures diverted resources from the private sector, and,
on the other hand, the measure produces an adverse effect
on the balance of International payments Keynes
probably influenced the President in his vigorous exten
sion of credit institutions for financing public proj-
112
ects and agrarian reform.
The Nationalization of Railroads and Petroleum.
Volumes have been written about the oil dispute. Pre
vious chapters revealed Mexico*s sensitiveness over the
domination of foreign interests. The Diaz regime offered
generous examples that foreign enterprises, mainly in
the extrative industries, were diametrically opposed to
the spirit and aims of the revolution. The conflict
represented two different orders having different norms
and different value systems.
As a participant in the nation*s development, the
oil Industry had a minor multiplier effect on the domestic
economy, as witnessed in previous discussions under the
Carranza regime. Prior to nationalization, the level of
oil production had been falling for about a decade. For
eign capital had begun to move to other areas, such as
111
Brothers and Solis, op. cit., p. 20.
112
Glade and Anderson, op. cit.. pp. 120-121.
263
Venezuela. Too, export demand, and petroleum prices were
dropping. From the Mexican point of view, the industry
was declining, to the general detriment of the economy.
Moreover, the oil enterprises had been primarily geared
to export markets, had done relatively little to culti
vate domestic consumption, and had tended to rely upon
continued employment of highly paid foreign technicians
and managers
There were many factors Involved in the oil con
troversy. Two are of special Importance here: one of
an economic nature, and the other affecting the autonomy
of government. The oil companies had negotiated their
major concessions Tinder the rules of the Diaz regime.
The levy at that time was 10 per cent of the profits,
and for a time the largest producer managed— quite le
gally— to be exempted from all taxes except some nominal
stamp taxes. Later, the Constitution of 1917 altered
the rules of the game, as described in a previous sec
tion. The Carranza, Obregon, and Calles Administrations
each tried to capture a share of the profits which oil
114
exports were generating, but without success. It was
hard for the oil companies to realize the fundamental
113Ibld.
114
Vernon, 0£. cit., p. 77.
26U
changes in the new political and economic determination
of the nation.
The immediate cause for expropriation, and one
that challenged the government's autonomy, was a labor
dispute between the oil companies and the union workers
Before Cardenas* time, oil workers had been organized
in a multitude of small, weak unions. The President
brought about their unification under a single leader
ship. The new union made numerous demands, some real
istic and some not, with reference to higher pay and
fringe benefits. The major companies turned down the
key demandsThe unions threatened a strike.
Cardenas, however, Intervened to arrange a six months'
period for further talk; but bitterness between the
union and the oil producers Increased instead of lessen
ing. A general strike took place in Hay, 1937* after
the "cooling off" period."*"^
The dispute went to the Federal Board of Con
ciliation and Arbitration which granted the union's re
quest. When the oil producers refused to comply, the
case was taken to the Supreme Court which upheld the
Federal Board. Again, the oil producers refused to com
^^Padgett, Oja. cit.. p. 36.
ll6Ibid.
265
ply, thus forcing the Presidents hand. The impasse
clearly indicated to the Mexicans that national honor
and sovereignty were at stake. Without considering the
economic consequences, President Cardenas issued his
famous decree on March 17, 1938, nationalizing the whole
oil industry, and during the next decade, settlement of
claims was made by the Mexican government to the oil pro-
117
ducers In the amount of 2k million dollars.
Oil expropriations had adverse effects on invest
ments . Foreign capital became openly reluctant to any
further investment in Mexico. The outlook was towards
retrenchment, rather than expansion. This was true not
only in the Industrial sector, but in the large-scale
agriculture in the Worth— the cotton, wheat, and cattle
areas. Cotton growers, for example, refrained from fur
ther expansion in irrigation and land development. The
nation may have lost at this time a portion of net capi
tal formation, although Cardenas was selective on the
kind of foreign capital he encouraged for development.
President Cardenas did not nationalize the
railroads— the greater portion had been expropriated
before the revolution. He did, however, expropriate
117
1 Frank Tannenbaum, Mexico; The Struggle for
Peace and Bread (New York; Alfred A. Knopf, 196^) , p.
231.
the National Railway System, a property already govern
ment-owned, in order to remove the voice that foreign
creditors had maintained in their management. Thus, in
financial terms, the President added the railroad debt
I I Q
to the over-all public debt.
Industrialization. With the expropriations dur
ing the Cardenas Administrations, the investment climate
was not entirely conducive to private expansion. There
was a positive side, however. Cardenas was not against
foreign capital, per se. He invited their Investments
whole-heartedly, but not on the basis that the foreign
extractive industries had operated in Mexico in the past
He sought foreign capital that was willing to help build
Mexico and grow in the process as well. On the other
hand, Cardenas left much of the large Mexican-owned busl
ness sector untouched. And if a cement, sugar mill, or
textile factory was taken out of private Mexican hands,
the financial and organizational structure of the com
panies were generally weak in the first place.
Cardenas took steps to revive the sugar refining
Industry as well as the growing of sugar cane. His
most notable project was in the valley of Morelos, where
118
Brandenburg, op. pit., p. 9 8.
119ibid.
267
the sugar Industry had flourished during the Diaz regime,
but had been destroyed during the bloody revolutionary
days. Much of the valley was taken over by wild vege
tation; some areas were used to raise corn by the Indians
who managed to extract a meager subsistence. To rehabil
itate the area, Cardenas built a large, completely modern,
sugar refinery. The peasants raised the sugar cane and
were organized into a number of cooperatives. Then, as
groups, they participated in the management of the mill,
120
cooperatively with the refinery employees.
The sugar project revealed Cardenas' views on
industrial development in Mexico. Economic growth meant
tying Industry to agriculture. This meant establishing
manufacturing units in rural areas, thus bringing indus
try to small villages and avoid forcing the rural people
into cramped urban centers. In this way he hoped to ob
tain for the Mexican people the material advantages which
industry could provide, without engendering the evils of
1 PI i
urban industrialism. The economics of Cardenas' sugar
projects was probably in keeping with effective resource
allocation. The economics of plant location is a signifi
cant factor in terms of alternative cost of transporta-
120Mosk, 0£. cit., p. 5?
1 2 1Ibid., pp. 5 8.
268
tlon between raw materials and finished products. Sugar
cane is bulky, space consuming and of higher freight
unit cost, if transported to sugar mills located in the
Industrial centers, as compared to packaged sugar ship
ped from the rural area to urban centers.
Public Expenditures and Monetary Problems
Cardenas' public expenditures were notable in
the agrarian reform measures he undertook. The ejidos
and collective farms required heavy outlays of capital
to supply the farmers with materials, machinery, and
irrigation. This was not all. Sanitary measures were
introduced together with "travelling clinics and other
health measures."
The government's fiscal policy Tinder Cardenas
undertook extensive projects in irrigation (267,000
122
hectares by 19^0), the building of schools throughout
Mexico, railroad'construction, harbor Improvements,
highway construction, construction of city sewers and
sanitation, and the extension of government-owned en
terprises. Notably, President Cardenas heavily emphas
ized social overhead capital. By the end of his admin
istration, total investments in public works came to
122
Glade and Anderson, op. clt., p. 6 5.
269
about 1,018 million pesos.Budgetary deficits were
recorded each year from 1936 on. All of this effort had
some beneficial effects on the economy, as noted in a
previous section, but nonetheless there were adverse in
flationary effects.
The government's public investment program and
public spending accompanied by monetary expansion, gave
rise to higher price levels, most noticeably during 1937-
19^0. Prices rose (1929 = 100) from 96.2 in 1936 to
*i p h .
122.8 in 19^0. The government attempted to finance
the agriculture and public works expenditure by means of
bond issues, but neither the public nor the banks showed
a willingness to buy such government securities. Con
sequently, the government resorted to further borrowing
from the Banco de Mexico, the central bank. There was
reluctance in the capital markets to Invest in govern
ment securities. Besides, capital funds were scarce.
Alfredo Navarrete, one of Mexico's leading economists,
put it this way: "Could we have resorted to a (practic
ally) nonexisting capital market, or could we have ap
pealed directly to the voluntary savings of the wealthy,
opposed as they were to the revolutionary program of
123
-'Vernon, op. clt., p. 85.
124
Mosk, pp. clt., p. 274.
270
agrarian reform? .... This is to give you a clue as
to why my country, in order to finance agriculture and
industrial development programs, resorted, at that time,
to an ample overdraft on the government account with
the central bank .1 1
There was a double edge to Cardenas’ deficit fi
nancing. First, it was a measure for financing his bud
get deficits, which for the most part were directly mone
tized, as noted, by means of purchase of government se
curities by the Banco de Mexico. Secondly, the Presi
dent attempted to counter deflationary tendencies prior
to 1936 in order to promote recovery and economic de-
velopment. The money supply nearly doubled, however.
Consequently, inflationary pressures increased due also
to other related factors: the rate of Increase in na
tional product (particularly consumer goods) did not
keep pace with the rate of increase in the stock of
money in circulation (understandably); moreover, some
12*5
^Alfredo Navarrete, "Comparative Analysis of
Policy Instruments in Mexico's Experience," in Werner
Baer and Issac Kerstenetzky, (ed.), Inflation and Growth
in Latin America (Homewood, Illinois: Richard D. Irwin,
Inc., 19W , " p. 352.
I26
Brothers and Solis, op. clt., p. 20.
271
resources were drawn from the private sector for the
expansion of social overhead capital. Eventually, im
port surpluses developed, thus creating balance of pay
ments difficulties which forced the government, as noted
earlier, to devaluate the peso from 3*60 pesos per dol
lar to ^.85 pesos per dollar,
Thus, inflationary situations have been both the
cause and the effect of deficit spending. The usual
case is one where inflation reduces fixed-budget expen
ditures in real terms unless the budget is adjusted up
wardly in money terms; but again, further inflation is
encouraged if financing is done through central bank
borrowing. Professor Nicholas Kaldor believes that in
the long run inflation is not a very efficient way of
financing underdevelopment. There is a partial justifi
cation, however, depending on the way Inflation is used.
For example, if the currency issued or the credit granted
has been used to finance public investment in infrastruc
ture, Inflation will be less than if it has been utilized
to Increase expenditure in an inefficient bureaucracy 2 ^
"^^Nicholas Kaldor, "The Role of Taxation in Ec
onomic Development," in Inter-American Development Bank
and Economic Commission for Latin America, Fiscal Policy
for Economic Growth in Latin America. Papers and Pro
ceedings of a Conference held in Santiago, Chile, Dec
ember, 19^2 (Baltimore: The Johns Hopkins University
Press, 1965), p. 90.
272
The latter was not the case of the Cardenas Administration
for at least a good portion of the expenditures went for
the economy's Infrastructure.
Ordinarily, persistent budgetary deficits tend to
force monetary authorities to follow a restrictive cre
dit policy (to protect the balance of payments and to
limit the pace of inflation), which in turn has a highly
123
undesirable effect on the pace of economic growth.
This was not altogether the case with Cardenas' policies,
because, while he was quite concerned with inflation
during the latter period of his administration, he did
not pursue a restrictive policy. Besides, monetary con
trols had not been well established to the sophisticated
129
level they are today. His financial policies did work
to support the greatly expanded volume of public expen
ditures, but had it not been for the advent of World
War II, these policies would have necessitated a painful
financial readjustment in the early 19^0's .-*-30
In an overall view of the Cardenas administra
tion, the economy attained not only the political sta-
128Ibld., p. 71.
129Ibld.
130
Brothers and Solis, loc. cit.
273
bility extremely important to economic growth, but a
rudimentary stage of financial development, for instance,
the launching of Nacional Financiera, the Ejido Bank,
the National Worker's Bank for Industrial Promotion, and
the National Union of Sugar Producers,
The development of the nation’s infrastructure
set the stage for rapid economic development which took
place after World War II. While some foreign capital
(American) became reluctant to expand, other capitalists,
native and European refugees, expanded their enterprises.
Table indicates the rapid growth of two important sec
tors, manufacturing and commerce, during the administra
tion. Building construction and transportation made im
pressive gains. It is notable that petroleum and agri
culture did not keep abreast the rate of growth of the
national product.
President Cardenas' development policies were
not entirely along the lines of classic capitalism, but
this only reaffirms the views of such writers in econom
ics as Preblsch and Myint. The problems with budget
allocation and public projects gave him more than Just
a nodding acquaintance with the need for formal plan
ning, And lastly, while agrarian reforms were not ef
fectively continued by the next two administrations,
27 k
President Cardenas kept faith with the vast peasantry
and union workers by the efforts he made for their
betterment. During his administration, the government
took another large step in setting the role it now
plays in the economic development of the nation. Thus,
it is not surprising that the majority of his compatriots
consider him the father of modern capitalism in Mexico.
VI. SUMMARY AND CONCLUSIONS
The period from the Revolution of 1910 to 19^0
marks a significant departure from the political tur
moil of previous eras, when legitimacy of government
and widespread political participation were at a low
ebb. The Decree of 1915 Ly Carranza, and later the
Constitution of 191?» established legitimacy and the
kind of role central government was to exercise in im
plementing economic reform. Thus, by 19^0, Mexico had
achieved a level of political stability that afforded a
concrete and permanent role of government in the economic
growth of the nation.
The Political and Economic
Revolution of 1910-1920
The period from 1910 to 1920 was one where two
separate revolutions took place— each happening simul
275
taneously. The first was for the purpose of promoting
social justice and unifying the Mexican society, through
the new revolutionary goals, into an ideology. The sec
ond revolution, and as part of the ideology, was eco
nomic reform. Thus, the Constitution of 1917 was the
synthesis and symbol of the Revolution. The basis of
its vitality was social and economic change, and, in
each process, the government was to play a particular
role in Implementing that change.
The constitution of 1917 established legitimacy.
Thus, Mexico was prepared to carry out the Revolution.
At this juncture, economic reform became the prime con
cern of government. But to the Mexican intellectuals
who had influenced the revolution, economic reform
meant agrarian reform as the measure for promoting
social and economic justice for the vast agricultural
population. The idea of industrialization was on the
whole secondary as a means to development. This is not
to infer, however, that government leaders of the 1920’s
were unmindful to the benefits of industrial develop
ment. But the established goals of the Revolution pressed
for agrarian reform. It was noted in an earlier part of
this chapter that Carranza, Obregon, and Calles distri
buted lands to the ejidos, but, nevertheless, not en-
276
ttrely to the extent that might have been expected from
the Revolution. On the other hand, Calles initiated
important monetary reforms, such as the establishment
of the central bank, which served as an early basis
for industrial development in the following decade.
And, in addition to the early development of an infra
structure, Calles established the National Agricultural
Bank in 1926.
To the Mexican intellectuals, Cardenas was the
leader who brought the "ideals" of the Revolution to
full bloom. The oil, mines, and some agricultural lands
were expropriated in the interest of the nation. The
Nacional Pinanciera was established in 193^ which was
later to become the leading development bank of the
economy. Cardenas also made sweeping agrarian reforms.
The tenor of his administration was not for urban, but
rather for agrarian development and the fulfillment of
the Revolutionary Ideology. It has been said, however,
that with the end of the Cardenas administration, the
Revolution reached its true Thermidor, for the post
World War II years saw a marked shift and an emphasis
on industrialization and what some social thinkers re
gard as a neglect of the rural economy. It was not un
til the Lopez Mateos administration (1958-196*0 that
the government attempted to revive true agrarian reform,
and bring the economy as a whole to the principle of
balanced growth.
The Role of Government In Mexico's Economic
Development from 1920 to World War II
It has been noted In the above discussions that
by the end of the Cardenas administration some of the
nation*s basic resources had been nationalized. Petro
leum, mining, a portion of the agricultural lands, the
railroads, electric power, water supply, and much of
the irrigation system were under the direction and con
trol of central government. The development of the na
tion's infrastructure, however, did not begin In con
crete terms until 1920. Central government's objectives
were to execute projects essential to social overhead
capital and to promote private investment. The public
sector also initiated Investment in fields in which
most private capital was unable or willing to partlclpat
The federal budget and fiscal policy were not
the only means of activity in the economy. The govern
ment took a more direct participation through public
credit in the operation of public enterprises for rea
sons of national Interest. Thus, as noted, the elec
tric power facilities, transportation, petroleum, the
278
creation of a steel mill, and the mines were fostered
by government. But the development of these enterprises
over the years drew heavily from the nation's resources.
The result of this effort placed strain and shortages
on resource allocation on consumer goods, that, together
with public credit financing, had on the whole severe
effects on the real income of the nation, particularly
on the rural population.
Throughout the 1920's, the percentage of econom
ic expenditures In the total budget averaged about 25
per cent. However, the development of the national
highway system, irrigation, sewage systems, and drinking
water drew some additional investment funds from the
Banco Urbano de Obras Publicas (Public Works Bank).
Thus public credit, in addition to the federal budget,
became a major source for enlarging the nation's infra
structure .
Monetary policy also played a leading role as an
Instrument to economic growth. As a central bank, the
Banco de Mexico was authorized to Issue the national
currency, serve as the fiscal agent of the government,
and extend credit to the private sector. On the other
hand, public expenditures accompanied by monetary ex
pansion gave rise to inflationary pressures. This par
279
ticular situation developed when the government had
attempted to finance its public expenditures by means
of bond issues, but at that time (1936-1938) the secur
ity market was unwilling to purchase government secur
ities. Thus, the central government resorted to over
drafts on the government's account with the central
bank.
But deficit financing served a double purpose.
First, it was a measure for financing budget deficits
which were monetized by the purchase of government se
curities by the Banco de Mexico. Secondly, by expand
ing the money supply, the government attempted counter
deflationary tendencies prevalent at the end of the
1930’s- However, the money supply nearly doubled and
inflation became significant, not only for the above
reasons, but also as a result of "demand pull" condi
tions as resources were drawn from the private sector
for the expansion of an infrastructure. In other words,
the rate of increase in the Gross National Product (par
ticularly consumer goods) did not keep pace with the
rate of increase in the stock of money in circulation.
The period from 1920 to 19*1-0, therefore, set the
stage for the greater role the government later played
in economic development. The nationfs social overhead
capital was sufficiently developed to assist in the
greater expansion that took place during the World War II
years. The government’s participation in the economy
had been well established in such areas as: (1) the
central bank and its credit facilities to the private
sector and the government itself; (2) a substantial part
of the budget for the development of social overhead
capital; (3) credit facilities for the agricultural econ
omy; and (4) the Nacional Flnanciera, which was to be
come a powerful and successful development bank, not
only for the promotion of public enterprises, but as
an agency for lending to the private sector as well as
for investments essential to the domestic economy.
CHAPTER VII
MODERN MEXICAN GOVERNMENT AND ECONOMIC
DEVELOPMENT, 19^0/1962
I. INTRODUCTION: PURPOSE
AND ORGANIZATION
The present chapter covers a dynamic phase In
the industrial development of the Mexican economy. This
growth rested on the political organization and eventual
stability attained from the struggles of the Revolution
of 1910, and subsequently the Constitution of 1917.
The earlier revolutionary goals called for social
changes in the form of political and agrarian reform as
discussed in the first section; but the core of the
chapter presents the shift In the ideology of the Mexi
can revolution as witnessed after World War II. Thus,
the revolutionary goals and aspirations were translated
from agrarian to emphasis on industrialization. Further,
unlike some underdeveloped countries, Mexico had already
attained the capital formation and Infrastructure to
282
yield, a "take-off" during the post World War II years.
The early part of Chapter VII presents the argu-
ments for Industrialization as furthered by the tecnlcos
against the pro-agrarian reform held by the intellec
tuals who claimed adherence to the revolutionary ideals.
A later section discusses the political framework of the
single-party system and the power of presidential de
cision which translated the early revolutionary goals to
industrial development— with the central government play
ing a significant role in that process.
In keeping with the above discussion, Section III
outlines the main institutions in government. Known as
The Central Guidance Cluster, they serve as a core of
strength, vitality, and direction for economic develop
ment. This unique system was devised by President
Cardenas In lieu of a "Central Planning Agency." In
view of the absence of institutionalized functions in
Government at that time, the President felt that a flex
ible network of central guidance would best serve the
development process during its embryonic stage.
By 19^0, the governments economic apparatus was
organized sufficiently to contribute significantly to
the shift to industrial development as indicated in
Section V. In Section VI, on the other hand, we show
283
the strategic dimensions of government policy In the
form of rapid development of an infrastructure, growth
of public enterprises, and promotion of tourism, which
served as an Important source of government revenue and
as a financial means to economic development. Infla
tionary pressures were, however, inevitable as a result
of demand for resources in the process of capital for
mation and the rapid expansion of the money supply, as
described in Section IV.
II. THE QUEST FOR INDUSTRIALIZATION
There is a widespread belief in many underdeveloped
nations that industrialization is the only course for
increasing the general standard of living. Indeed, in
dustrialization is regarded as a "must" and as a panacea
for all economic Ills. They are prone to conclude that
an Increase In wealth Is surely to follow from industrial
ization. Often, these economies fail to give considera
tion in depth to the extent of their traditional environ
ment, social attitudes, the smallness of their markets,
and their rather limited supply of entrepreneurs as im
mediate obstacles to development. And, equally signifi
cant, new sources of capital funds for development pre
sents a problem to a traditional raw material supplier.
28 U
Chapter II discussed the economic nature of this prob
lem.
Economists In this field of study are likely to
ask basic questions as to the purpose and value of in
dustrialization. For instance, can industrialization
help stabilize income as a departure from the instability
of raw material nations who depend on the appetite and
prices of the industrial factories of advanced economies?
This would be the case where industrial development may
be a partial replacement for raw material production. On
the other hand, can industrialization help generate in
come? If this should be the objective, there are several
considerations that justify it, for example, industrial
output may be an addition to raw material output, and,
therefore, an increase in productivity and real per capita
income. But would this be an automatic process?^ Mexico
has placed a strong emphasis on industrialization since
19^0. By that time she had had the advantages, though
limited, of social overhead capital and entrepreneural
development from the Diaz administration, as well as an
early impetus to growth during the 1930,s.
^Walter Krause, Economic Development (Belmont,
California: Wadsworth Publishing Company, Inc., 196l)
p. 118.
285
Victor L. Urquldi, a Mexican economist trained
in England, cites serious imbalances in recent develop
ment experiences. He contends that while some Latin
American countries have attained a good measure of ec
onomic growth, they have not been able to develop their
agriculture at the same rate. Therefore, lacking suf
ficient stimulation, agriculture has been only partially
2
modernized. Mr. Urquidl, no doubt, had Mexico in mind,
for some of her agrarian reform has only allowed sub
sistence to the Indians. Much of the land the Indians
have acquired is of low quality and, consequently, little
or none of the national benefits have trickled down to
them.
Mr. Urquldi is optimistic, nonetheless, about the
ultimate benefits from industrialization "because the
structural change to industrialization is irreversible
and leads increasingly to expansion into new industries
that directly or indirectly create demand for primary
products."-' But agrarian reform is an enormous social
and economic problem to implement. Large-scale agricul
ture has been successful, but much of the Ejldo Indian
^Victor L. Urquldi, The Challenge of Development
in Latin America (New York: Frederick A. Praeger, 1964),
P. 13-
3Ibid.
286
population needs to overcome the rigidities of the tra
ditional society, so that education and modern agricul
tural techniques can be used more effectively, and thus
the Indians can participate more widely in the exchange
economy.
The extent and method of participation, direction,
and Influence by government in the development process
Is better understood through the national consensus on
the method of Industrialization. The big surge for In
dustrialization emerged with the advent of the Second
World War. True, the drive for industry (of the local
variety) in the 1930's had gathered the necessary vigor,
in part through the ideology of the Constitution of 1917*
as well as the social and political stability the country
enjoyed for almost two decades. The depression and cur
rency depreciation, together with the Inflow of refugee
gold from Europe, afforded greater domestic investments.
Although large foreign industries had become wary of
President Cardenas* nationalism, these industries were
of the extractive type and were not an organic part of
the economy. Thus, the policies of the 1920's and the
Infrastructure implemented during the Cardenas Adminis
tration set the stage for further economic development.
The big push during 19^0/1960 placed strong emphasis on
287
a wide range of industrialization, and on further de
velopment of the infrastructure. The revolutionary ob
jectives and government implementation of credit and
public enterprises served as the adrenalin to the
nation's economy.
Opposition to Industrialization
The traditional social and economic life of
Mexico had been agrarian, and the nation's folkways and
mores flowed from the rural environment. The deep ec
onomic problems of the country were rural, that is, a
vast landless peasantry, low real income, and subsis
tence life. The Revolution and reform focused their
attention on redressing the political and economic in
justices of the past. The greatest clamor, as seen in
previous chapters, was for land reform. But effective
implementation of land reform, and general economic
growth of the nation, also required industrial develop
ment .
The Intellectual Mexican began to sense, however,
the greater emphasis on industrialization. It was not
so much that he objected to the latter; rather, he ob
jected to the impact that industrialization might have
on the national life and the traditional and social values
of the community. President Cardenas' attitude in this
288
sense Is reminiscent of our own Thomas Jefferson. It is
noteworthy, too, that tomes are being written today re
evaluating the Impact and merits that industrialization
has had on urbanization and on the social and moral values
of the American community.
Some foreign writers at that time had similar
sentiments, but in varying degrees and emphasis. Frank
Tannenbaum rendered a pessimistic attitude towards
Mexican industrialization. He was sad over Mexico's de
parture from the values of rural community, and suggested
that Mexico retreat to a "philosophy of little things,"
such as fostering little dams and irrigation, and develop
ment of small lakes for fish, effective cottage industries
and so on. He bemoaned the cynicism that had taken hold
of the country, especially in the cities. "The city
folk— especially Mexico City and government employees—
would make big plans, procure large foreign funds, or
ganize great industries, discover some magic in 'indus
trialization, * and have a national economy served by a
k
national market at any cost . . . "If Mexico were
wise, Mexican industry would be accepted as a supplement
k
Frank Tannenbaum, Mexico: The Struggle for Peace
and Bread (New York: Alfred A. Knopf, 1950), p. 2k*K
289
to an agricultural economy, and the emphasis would be
put on the marvelous energy and cohesive powers of the
rural community."^
The above values are not surprising, for Pro
fessor Tannenbaum reflected similar attitudes in his
studies in labor economics, where he saw labor problems
as social problems that stem from the dominance of the
machine on man. "It focuses his energies . . . destroys
his skills . . . regiments his working day . . . and
forces him to live in crowded and unkempt quarters."^
The late Professor Sanford Mosk was less pessi
mistic in his evaluation, yet he felt that deceleration
of industrial pace was not only desirable but essential.
The impetus to growth in the 19^0*s, he said, was merely
the result of immediate needs for resources during the
Second World War. It also marked a sharp break In govern
ment policy directions between Cardenas and his successor,
Avila Camacho, that is, a distinct shift from agrarian
to industrial goals. Among the several objections, Mosk
cited that "the phase of expansion that got under way In
5Ibid.
^Frank Tannenbaum, The Labor Movement (New York:
G. P. Putnam's Sons, Knickerbocker Press, 1921), pp. 6-7.
290
Mexico's iron and steel Industry in 1942 seems to be
nearing an end . . . new projects are reaching full
capacity In operation, and it is doubtful whether other
developments of substantial nature will be undertaken
7
for some time,11' When Professor Mosk wrote this study
(1950), steel production stood at 390,993 tons. In
I960, It was 1,539,537,8 and by 1966 it had reached
2,700,000 tons.7 Altos Hornos de Mexico, the govern
ment-owned steel mill, alone had a capacity of 1,430,000
metric tons in 1966.10
More micro in his approach, and reflecting con
clusions in a more negative tone, J. R. Powell has argued
that the oil expropriation was a failure, and pointed to
7
Sanford Mosk, Industrial Revolution in Mexico
(Berkeley: University of California Press, 1950), p7 145•
g
Prank Brandenburg, The Making of Modern Mexico
(Englewood Cliffs, N.J., Prentice Hall, Inc., 1964),
p. 276.
9
El Mercado de Valores, Naclonal Plnanclera S .A..
Suplemento Especial al No. 49, 5 de Dlciembre, 1966.
10
Brandenburg, loc. cit.
291
the period of confusion and adjustments following the
expropriation.^ It is difficult to concur with Mr.
Powell*s analysis, especially In view of the generous
amount of data available in this industry even at the
time he wrote his account. In 1955* Pemex, the sole
government-owned producer, had a refining capacity of
primary distillates of 237*500 barrels per day; In 1965
TO
capacity had risen to ^39.000 barrels.
The purposes of presenting the above discussion
is to reveal the prevailing feelings about Mexico*s
course of economic development in the 19^0*s as sounded
by domestic as well as foreign Cassandras. Some Mexican
intellectuals would have the role of government as one
fostering growth in accordance with the popular ideals
of the original Revolution, that Is, to stress agrarian
reform. To a large measure, Cardenas attempted to do
this. But there was another side of the controversy
that asserted itself through the strong consensus of
special groups; thus the course of the role of govern
ment shifted, with strong emphasis on industrialization.
. R. Powell, The Mexican Petroleum Industry,
1938-1950 (Berkeley; University of California Press,
1956)f PP. 10-11.
12
El Mercado de Valores, No. ^9* 1966, op. clt.,
p. !*}-.
292
Pro-Industrial Advocates and Mexico*s
Rapid Growth
The Second World War saw the emergence of a new
crop of young entrepreneurs, who were aggressive, nation
alistic, and dedicated to the idea of economic better
ment. This group was composed chiefly of owners of small
manufacturing plants who supplied articles to the do
mestic economy no longer available from foreign producers
due to war shortages. In the early 19^0’s, the new in
dustrialists did not have good relations with the old
11
financial establishment in Mexico. ^ Being advocates
of strong nationalism, they looked towards the public
sector for credit and protection from foreign competi
tion. They worked out a coherent and attractive broad
plan for an industrialized Mexico. Their social and in
dustrial programs became part of the base of new govern-
14
ment economic thinking. The new entrepreneurs also
saw eye to eye with the Tecnlcos.1^ on the idea of a
"balanced approach" to development, that is, the de
velopment of the agricultural producers of raw materials
11
-'Mosk, ojo. clt.. p. 21.
14
Howard P. Cline, Mexico. Revolution to Evolu
tion 19^0-1960 (New York: Oxford University Press, 1963),
p. 232.
1*5 /
The Tecnicos are considered the new professionals
such as engineers, economists, et cetera, who appeared as
an influential voice after the Second World War.
293
which will feed the rising industrial enterprises.
During the 19^0's, the new industrialists formed
an organization called Camara Nacional de la Industria
de Transformacion (National Chamber of Manufacturing
Industries). This group played an important role in
the development of an "industrial consciousness.1 1 It
is not surprising that the Chambers Influenced the course
of government action. The Chambers of Commerce are not
formally affiliated with the revolutionary party, partly
because they do not fit into the historical context of
the Mexican revolution as a mass movement for reform,
and partly because they (and all the Chambers today) are
a relatively new phenomenon which came into being with
industrialization, after the broad outlines of the revo
lutionary party had already crystalized. But these
Chambers have "friends at court" in the form of political
and functional organization leaders. Besides, the
government looks to the private sector as co-partners
in the growth effort, although not without conflicts
over government policies or regulations which may favor
one business interest over another, and visa versa.
Robert E. Scott, Mexican Government in Trans-
ition (Urbana: University of Illinois Press, 1959),
p. 24.
29^
The Older Industrialist. Xn contrast with the
new entrepreneurs, the older Industrialists were always
a powerful voice in the nation's affairs. The principle
members included the textile, beer, taqulla, steel, and
mining interests. Politically, this group allied Itself
with the leading merchants, large landowners, and the
leading banking institutions. These older industrial
ists were wary of government and the Revolution, and
still held strong symptoms of laissez-faire. Nonethe
less, the older business organizations had a definite
interest in Mexico's development. Their concern was
with growth in terms of their own interest (essentially),
and over the extent of regulatory measures and govern
ment participation In the economy.
The Tecnlcos and Industrialization. The role of
the Tecnicos stems from the Diaz regime, where they
served as professional administrators and advisors to
various government ministries. This was based on an
early recognition for the need of specialists in the
growing complexities of professional fields and of
government functions as well. The Second World War saw
the emergence of an increasing number of Tecnicos who
became a dominant Influence in government and in govern
ment-owned enterprises. In fact, the Tecnicos have be
295
come an Integral element In decision-making processes
on issues affecting Mexico*s development.
By the 19^0*s, fresh from their economic history
classes, they took a nationalistic position on the needs
for Mexico*s industrialization. They held large foreign
Investors suspect, especially the traditional type as
found in the extractive industries. They subscribed to
the economic theories of Latin American economists,
17
such as Raul Prebisch, f and also economists from advanc
ed nations.
In view of the doctrinal distinctions among them,
not all the tecnicos tended to agree on economic issues
and appropriate policies. A very small group are doc
trinaire Marxists, but a very large number tend to sup
port a mixed economy with Increasing emphasis on the
public sector. From this latter group, there are large
differences over appropriate public policies. For ex
ample, some tecnicos are associated with the Banco de
Mexico. Therefore, they tend to look on monetary policy
17
Dr. Prebisch advanced an analysis to the effect
that the classical school's concept of International di
vision of labor is out-dated, and theoretically unsound,
that the benefits are not distributed to the whole com
munity of trade, therefore, the underdeveloped countries
cannot accumulate capital. United Nations, The Economic
Development of Latin America (New York: 1950), pp. 1-2.
296
as an indlspensible instrument for insuring steady ec
onomic growth. Those employed by investing and spending
agencies, by contrast, see monetary restraints as a handi
cap to growth. The te'cnicos in the Nacional Financiera
(NAFIN— government development bank) put high priority
on steel mills, while economists in the agriculture
service place stress on irrigation and farm-to-work roads,
et cetera.'*'®
During the 19^0*3, the te'cnicos were among the
most articulate on the desirability of industrializa
tion of Mexico and the role government should undertake
in that process. Their arguments have been macro
economics oriented, with a high degree of sophistication,
stating reasons why Mexico should industrialize. Smart
ing from the effects of the depression, they advocated
that Mexico rely less on the export of raw materials and
import of machinery and manufactured consumer goods.
Thus, the economy would at least reduce the cyclical in
stability of international trade "telegraphed" to Mexico
as a result of the Internal Instability and market rigid
ities of industrial nations. There was also the "terms-
18
Raymond Vernon, The Dilemma of Mexico's Develop
ment (Cambridge, Massachusetts: Harvard University Press,
1953). P. 137.
297
of-trade" argument: A nation that relies on raw ma
terials in exports is forced in the long run to lower
her price of exports in relation to the price of her
imports. Essentially and simply, they were saying:
If 500 pounds of copper buys a stove in 19^0, it is not
unlikely to be 700 or 800 pounds by i960.19
Other advantages were presented. The te'cnicos
maintained that increased industrialization leads to
a more rapid increase in output per unit of manpower
and capital than does the increase in production of raw
materials (for export). To support their argument they
pointed out that: (1) capital formation in industry
promotes more efficiency than in mines and farms (they
felt their argument to be true at this stage of develop
ment); and (2) "external economies of scale" are more
likely to be realized In an Industrial complex than in
a raw material producing economy. For Instance, the
growth of a chemical industry supports the expansion of
an efficient electric generating system which makes an
20
efficient aluminum plant possible.
19Ibid., p. 1^2.
20Ibld.. p. 1^3.
298
The tecnicos were the strongest Influence on the
role that government had undertaken in promoting, direct
ing, and indirectly influencing the economic develop
ment of Mexico— by public credit to private and public
enterprises, by legislation for the national interest,
and by the borrowing of foreign capital through the
Nacional Financiera (NAFIN) and other public credit in
stitutions. The tecnicos have been quite explicit also
on the participation of the public and private sectors
in domestic capital formation. They popularized the
idea that certain types of investments cannot be real
istically left to the private sector: the financial in
vestment is too large, the uncertainty exceeds the risk
taking propensity of the private sector, or the welfare
and public interest is at stake.
The te'cnicos went even further in defining and
influencing the role of government. In their micro-
economic thinking, they have no Intention of interfering
with the price mechanism. But they have reservations,
if not misgivings, as to its effectiveness in allocating
resources, particularly during the "big push" toward de
velopment. They compare the division between Industrial
and agricultural production, and contend that monopoly
299
pricing by marketers keep agricultural profits low, and
that farm savings are diminished and their investment
discouraged. Accordingly, they have advocated heavier
public investments in irrigation, easier public credit,
and farm subsidies in the form of cheap fertilizer as
21
a means of offsetting the effects of monopoly pricing.
This is the general practice of government today, but
the tecnicos have further suggested that these public
expenditures should be financed, in part, from taxes on
marketers 1 net returns.
Foreign American Enterprises. These companies
have grown in number since the encouragement given by
the Avila Camancho administration (1940-1946) and the
Aleman administration (1947-1952). Some of these enter
prises are merely branches of American firms, while
others are established to produce exclusively for the
domestic market. All of them are important to the Mexi
can economy, and their earnings may be freely repatria-
22
ted. The enterprises are, however, in the manufac
turing sector and in competition with domestic producers;
therefore, it behooves them to maintain their share of
21Ibld.. p. 144.
22
El Mercado de Velores, No. 49, 1966, op. cit.,
P. 23. ~
300
the market through the expansion of net investments— an
advantage to the Mexican economy. At the end of 1965*
about 64 per cent of the direct investments from the
United States were In manufacturing, 9 per cent in mining
and smelting, and about 12 per cent In commercial ac
tivities.2^ Besides the American, there are other
foreign investments of Importance to Mexico, notably
from Germany and Italy. These include not only direct,
but also indirect investments as well.
III. THE CENTRAL GUIDANCE CLUSTER AS
AN INSTRUMENT FOR DEVELOPMENT
SINCE 1940
During the process or anticipation of Invest
ment decisions, the private sector Is concerned with
government policy. For example, private entrepreneurs
are concerned with government development of certain
resources, subsidies, tax concessions, tariff protection,
credit possibilities, and monetary policies.
The private sector also examines carefully the
President*s annual message to congress on Immediate plans
and proposals, as well as on legislation which will af
fect the course of economic development In the form of
23ibid.
301
new Infrastructure, Investments by public enterprises,
and monetary policies. The business community knows
that the Presidents message to Congress Is more in the
nature of declarative statements for future action rather
than proposals for consideration by Congress In the form
of fiscal budgets. Consequently, the private sector
looks to the "Big Four" for the proposals and plans which
will affect the economic conditions of the nation as a
whole.
The Big Four in Government
Since the 19k0*s several bureaus and offices
were established as planning and research organizations.
Some of these were functional while others were incor
porated In organizations within the various ministries
in the government. The nature of this study, however,
does not permit a review of the complex process of re
organization and the growth which has made for steady
building up of a capacity to promote change. It can be
said, however, that social and economic change in Mexico
is affected by a "central guidance cluster."
2k
Bertram M. Gross, "The Managers of National Ec
onomic Change," in Roscoe C. Martin, ed., Public Adminis
tration and Democracy; Essays in Honor of Paul H.
Appleby (Syracuse; Syracuse University Press, 1965)»
p. ilk.
302
Probably through experience gained in the military,
and intuition as well, President Cardenas refused to es
tablish a single, central planning agency. Instead he
set out to build a flexible network of central guidance
Institutions which have been followed by all his succes
sors to the present day. The result has been a guidance
cluster built around four powerful institutions: (1)
the Presidency; (2) the Ministry of Finance; (3) the
Banco de Mexico; and (*0 Nacional Financiera. Although
these institutions have been discussed in previous sec
tions of this study, the following account serves as a
restatement and synthesis of these powerful institu
tions which influence the course of development and ec
onomic conditions of Mexico.
The Presidency. This office is much broader than
the Ministry of the Presidency with its planning and in
vestment bureaus. The President is, of course, the most
powerful political leader. He possesses an unquestioned
authority throughout all the echelons of the elaborate
hierarchical structure of the PRI, an authority much
greater, for example, than the President of the United
States over the apparatus of his party. This does not
mean that the President of Mexico is not responsive to
pressures from various factions. The party organ pays
303
close attention to public opinion at state and local
levels. Moreover, professional politicians in the PRI
are sensitive to the views of important interests not
directly represented In the party, such as business
groups and leaders. The President also derives consider
able strength from big business and the military, and he
is often accused of lending too close an ear to the
former.2" *
The Ministry of Finance. As in the case of many
countries, this office Is involved in much more than
passive handling of taxation, credit, and foreign ex
change. The Mexican ministry of finance is an active,
growth-oriented organization, well aware of political
realities and the technological aspects of domestic ex
pansion and international negotiations. It Is also in
timately related at working levels with both the Banco
de Mexico and Nacional Flnanciera.
The Banco de Mexico. The central bank is a
unique financial institution, admired by the world*s
central banking fraternity. It combines the competence
and caution of a traditional central bank with a growth
orientation alien to the central banking ethos of the
2" * Ibld., p. xvii
30b
Western industrial nations. The Banco de Mexico (along
with the Nacional Financiera) has played an Important
role in money and capital markets, especially during the
1930-19^0 period. Its relations to the Ministry of
Finance have been generally amicable. It adapts its
operations to the requirements of government policy
directives and within this framework pursues, by means
of the instruments available to it, the objectives of
domestic stability. Generally, proposals for specific
monetary policy measures originate with the Banco de
Mexico. But before other than routine measures are
taken, the director of the bank consults with the Minis-
2 6
try of Finance.
Characteristically (especially in the last de
cade or so), government expenditures have exceeded re
ceipts. This has given rise to a continuous need for
financing government deficits and for determining how
these deficits ought to be financed. The Banco de
Mexico (and Nacional Financiera) is entrusted with the
responsibility of debt management; but in attempting to
reconcile essentially inconsistent objectives. For in
stance, domestic stability goals and balance-of-payments
26
Dwight S. Brothers and Leopold Solis, Mexican
Financial Development (Austin: University of Texas Press,
305
equilibrium may be difficult to attain simultaneously.
And neither of these goals in some cases is consistent
with the full utilization of productive resources and a
high rate of capital formation required for satisfactory
27
economic growth. In the past, much of this dilemma
has led to a compromise with inflation.
Nacional Financiera. This organization is no
doubt the strongest, largest, most experienced, and
the most flexible institution of its type among all in
dustrial nations. In accordance with previous discus
sions, NAFIN (supported by government funds) uses all
possible devices for financing industrial development.
It makes loans, buys securities, and guarantees foreign
and domestic bank credit in Investments. It also pro
motes competing undertakings— private, public, and mixed.
While unquestionably serving as an agent of political
masters, "it has posted a profit record which would do
credit to some of the best-managed of private enter
prises ." ^
The Big Four, furthermore, in addition to the
handling of critical roles of leadership and financial
2?Ibld.. p . 69.
p Q
Calvin P. Blair, "Nacional Financiera: Entre
preneurship in a Mixed Economy," Raymond Vernon, ed.f
Public Policy and Private Enterprise in Mexico (Cambridge:
Harvard University Press, 1964), pp. 201-202.
306
management, also provide technical research staffs of
competent economists and statisticians. The central
bank publishes Important reports throughout the year
including the monthly "Review of the Economic Situa
tion of Mexico." Nacional Financiera Issues annual
supplements in addition to the weekly "El Mercado de
Valores," which reviews legislation, economic plans
and proposals, and statistical reports (although there
are government data not reported entirely at times).
Finally, the Banco de Mexico and Nacional Financiera
are capable of responding to critical problems that
demand central and concerted action— whether it be an
inflationary upsurge, a foreign currency shortage, or
delicate politico-economic negotiations with other
countries.
IV. INFLATION, 19^0-1960
✓
Prices rose rapidly during the Avila Camacho,
Aleman, and Ruiz Cortines administrations. The "Big
Shift" from agrarian emphasis to Industrialization be
gan in 19^-1. The budget climbed steadily, especially
during the Aleman and Ruiz Cortines regimes, making for
extensive growth of Infrastructure and public enter
prises. During the same period, heavy direct Invest-
307
ment poured into Mexico, thus raising private capital
formation to new heights. United States* manufacturing
investments alone rose from 10 million (just before
World War II) to 355 million in 1959, approximately ^7
per cent of total United States' direct Investments
there
Although employment rose rapidly, real income
per worker lagged behind as shown by the inflationary
pressures during the presidential periods under discus
sion. Among the contributing factors, the total money
supply jumped from 1,060 million in 19^0 to 16,909
million pesos in I960. The velocity of circulation,
computed as a ratio of annual GNP to average money
supply during the year, fluctuated between 6.1 and 8.8
during this period. Thus, the upward pressure on prices
in domestic markets was unquestionably related to the
behavior of the money supply. These monetary experiences
are discussed in greater depth in the latter part of
Chapter VIII.
Table 17 offers evidence of the inflation story
of the 19^0's and 1950,s as it also relates to the growth
‘ ''^William P. Glade, Jr., and Charles W. Anderson,
The Political Economy of Mexico (Madison: The University
of Wisconsin Press, 1963, p. 8.
308
of the yearly budget, the expansion of infrastructure,
and the growth of private capital formation. Wholesale
prices were about three times higher in 1950 than In
19^0; an additional 60 per cent increase occurred be
tween 1950 and 1955- Beginning with 1958 there was a
sharp break in the rate of price increase and Mexico
began to show symptoms of "stagnation" (during the early
part of Lopez Mateos' administration).
Throughout the period under discussion, the gross
domestic product increased from ^1,060 million (19^0)
to 7^.317 million pesos (1950 prices) in i960. The GNP
made considerable gains (In real terms) in spite of the
severe inflation during the 19^0's and 1950's. Several
sectors were quite important to economic growth. Manu
facturing and commerce and trade accounted for no less
than 50 per cent of the GNP during the 1950's, with agri
culture, livestock, and transportation following in order
of their Importance. The high increase of the federal
budget under Lopez Mateos in the early 1960's had the
telling effects of a large growth of the GNP, from 7^,927
million to 99.598 million pesos— an Increase of 25 bil
lion pesos in five years.
309
Deficit Spending and Inflation
Budget deficits of the 19^0-1955 years show rela
tively smaller amounts, as compared with 1956-1960, all
of which were for the most part financed by the Banco
de Mexico, and to some extent by bank deposits which
30
were thereby directly monetized. It is difficult to
state an approximation of the average per cent of bud
get deficits to the Gross National Product due to con
flicting data. For example, a wide difference exists
between the 19^-0-1955 figures given by Brothers and
Solis, the monetary theorists, and Professor Wilkie.
The former depended a great deal on data furnished by
the Banco de Mexico and the Nacional Financiera as a
basis for their computations. Some of Professor Wilkie's
references came from Trlmestre de Marometros Economico,
and the Comnenio Estadistlco from Direcclon General de
Estadfstlca. The latter furnished the price index pre
sented in Table 17 » and differed from the one compiled
by the Banco de Mexico.
There is much closer agreement on public sector
deficits, as an average per cent of the Gross National
Product during 1956-1960, between Brothers and Solis and
30
Brothers and Solis, o£. clt.. p. 80.
310
Professor Wilkie. The former Indicates 1.9 per cent
of the Gross National Product,^ while Professor Wilkie
shows a 2.3
The rate of Inflation after i960 invites attention,
as its expansion was definitely lower than in the previ
ous decade. As noted previously, the large increase in
the budget in 1964 (28,286 million current pesos)
made for further development of the infrastructure. At
the same time, the business community attained greater
confidence by Lopez Mateos' reversal of the restrictive
monetary policies of the previous administrations be
cause, in the absence of serious Inflation and balance
of payment difficulties, it became possible for the
monetary authorities to Introduce greater ease Into
financial markets, thereby inducing some decline in the
34-
interest rates.
31Ibld.. p. 168.
32
^ James W. Wilkie, The Mexican Revolution
(Berkeley: University of California Press, 19^7)» P«
28.
33E1 Mercado de Valores, No. 49, 1966, op. clt..
p. 30*
34
Brothers and Solis, pp. pit., p. 180.
311
V. THE POLITICAL FRAMEWORK FOR
GOVERNMENT DECISIONS
We have discussed in Chapter VI the organization
of the single-party system as begun by Plutarco Calles
and refined by Cardenas. The president has emerged as
the leader of the PRI as well as the Chamber of Deputies
since the PRI controls the election machinery of federal,
state, and local officials. Even today, it would be dif
ficult to overstate the amount of political power the
president wields. But one could easily misunderstand
the source and nature of that power for, although the
president remains the strongest single political leader
in the country, the basis of his strength has shifted
radically from what it was only a few years ago. Today,
the presidential function does not depend upon person-
alistic leadership of a group of political adherents as
in the days of early constitutional presidents such as
Obregon, Calles, and even Cardenas— the last of the cau-
dillos.
The institutionalization of the presidency is
such that the president no longer needs face-to-face con
tacts with all of his followers or even of the leaders
of the major power factors in the political system. In
312
stead, consultation and decision-making have been sys
tematized, so that discussion takes place at lower levels,
between interested representatives and the bureaucracies.
In fact, the largest portion come directly from the ex
ecutive departments, which have the day-to-day task of
facing and trying to solve the many problems plaguing
the country. Thus, a policy question moves up through
the ministers heading the executive departments, or
through the sector leaders of the PHI, to the presi-
3 3
dentail level, where high policy is decided.^ Bearing
in mind that the President is the strongest political
leader of the PRI.
Congress Is subordinate to the President. As
long as the official party carries out its function of
liaison and political communication effectively, and as
long as the President successfully balances Interest
conflicts with regard to special goals of the various
q A
organizations, there is reason to expect that legal
-^Scott, o j d . cit., p. 279.
^^Slnce Cardenas and Aleman, the President has
learned the necessity of compromise in trying to keep
the revolutionary coalition Intact; each chief execu
tive and head of the government party has faced the
pragmatic problem of conceding sometimes to the demands
of the other wing of the party In order to keep working
agreements between them operative. Each President makes
the necessary adjustments according to his own thinking.
313
approval for the acts of the President can be obtained
from Congress without question. The President, therefore,
is the key to the whole process of decision-making. The
question of formulating and resolving policy is done
through a complex mixture of official and semi-official
government units, political bodies representing both
geographic and functional Interests, commercial and manu
facturing interest associations not identified officially
with any political party, and a number of other interest
groups. This is the approach to social, political, and
economic consensus, and, since the unification of all
these interests is not achieved through the legislative
process, no single consultative agency other than the
President and his staff exists to provide integrated
17
policy. f
VI. EXPANSION OF THE INFRASTRUCTURE
AND DIMENSIONS OF DEVELOPMENT
The Avila Camacho Administration (19^0-19^6)
marked a decided shift and emphasis in industrialization,
but a certain background for it had been established by
his predecessor.
-^Scott, ojd. clt.. pp. 279-280.
31^
Cardenas' programs stressed reform and hence
social change— the latter to become a source of reaction
in subsequent years. His land reform was the most In
tense program compared with any other president to date.
And while Cardenas' agricultural programs did not realize
his expectations, his mild industrial promotion made
adequate gains only at the domestic level. The expro
priation policies brought foreign investments to a low
ebb during the latter part of his administration. None
theless, Cardenas' contributions, directly or indirectly,
furnished the basis for further industrialization. This
is evident by the expansion of the nation's infrastruc
ture, the strengthening of the single-party system for
political stability, and the lnquguratlon of deficit
spending, as well as setting the standards for social
and economic budget policy.
Land reform and social expenditures paled during
*
the administrations of Avila Camacho (19^0-19^-6), Miguel
Aleman (19^7-1952), snd Adolofo Ruiz Cortines (1953-1958).
These were the eras of heavy emphasis on industrializa
tion and the promotion of an investment climate. Al
though Avila Camacho began the big surge toward indus
trialization, it was Aleman who placed great stress on
the promotion of foreign investments, most of which at
315
that time came from the United States. Ruiz Cortines
followed a similar policy.
The emphasis on industrial growth brought about
a drastic drop in land distribution; and while less in
tense, this was also the case of social expenditures.
Nonetheless political speeches and government reports
continued to exalt the need for social betterment. By
contrast, the Lopez Mateos administration (1958-196U-)
raised land distribution almost to the figure formerly
held by Cardenas and brought social expenditures to higher
levels. At the same time, economic development expendi
tures were reduced to a lower percent of the total budget
(see Table 12 in Chapter VIII).
Thus, the surge for industrialization in the early
19^0*3 launched the promotion of direct and indirect
foreign capital; but by virtue of this effort, it became
necessary for the government to further develop the na
tion's infrastructure. This meant expanding domestic
credit facilities for agriculture and the domestic pri
vate sector; initiating large fixed-capital investments
in public enterprises that furnish energy and oil to the
private sector; promoting the appropriate monetary policies
designed to further the growth process and to maintain
economic stability.
316
It is noted in another section of this chapter
that the objectives of monetary policy In Mexico have
differed to a surprising degree from those of the United
States. In the latter, monetary policy objectives are
those of domestic full employment, price stability, and
maintenance of orderly conditions In the financing mar
kets. In Mexico, monetary policy has been oriented to
■a Q
a large extent to the promotion of economic growth.
Fiscal policy has been a less important technique, at
least not until the 1960*s, when concern over "full em
ployment" became a government issue and thus revealed
Mexico's structural economic development and early symp-
39
toms of stagnation.
Public Enterprises
The quest for industrialization in early 19^0's
also prompted the promotion of government-owned enter
prises. The most promlnant are the petroleum Industry
(Pemex) In 1938» the electric-power industry (Federal
Electric Commission) In 1937. the national railways under
the supervision of the Ministry of Communications, and
3 ft
Brothers and Solis, ojd. clt.. p. 52.
Vernon, pp. clt.. p. 1 1 6.
317
Altos Hornos, S.A., the government-owned, steel mill.
These enterprises have been financed through a system
of domestic and international loans. Domestic loans
(Industrial and Irrigation) are financed by the Nacional
Financiera (NAFIN) for public and private enterprises.
Indirect loans are international loans, all of which are
handled by NAFIN whose bonds are sold to underwriters
in the United States, England, France, Germany, and Italy.
All foreign loans to NAFIN are guaranteed by the Repub
lic of Mexico, and they become the reserve and basis for
domestic lending to the public and private sectors. Bonds
are not the only financing Instruments used by NAFIN.
Direct loans are made by European, New York, and Calif
ornia banks--for example, the United California Bank.
Insurance Companies engage in similar lending operations,
such as Equitable Life Insurance Company of America.
Public enterprises may receive direct loans, but
only from the Import-Export Bank and the World Bank. The
largest source of funds for development come from NAFIN,
and with the exception of the above international banks,
none of the public enterprises receive any direct loans
from foreign creditors, as NAFIN Is the intermediary for
foreign borrowings.
Social Overhead Capital
The expansion of the nation's highways has been
a major effort since the Cardenas Administration, But
large public expenditures for highways began during the
Aleman administration, and about doubled under the presi
dency of Lopez Mateos (1958-196*0 , The network of high
ways has been an lndispensible part of the nation's ec
onomic development, but also facilitates tourist travel
ling to most areas of Mexico, This contributes to the
country's output of goods and services and a substantial
foreign exchange of dollars. Table 6 presents the
growth of the highway system.
The National Railway System
The railroads are under the supervision of the
Ministry of Communications, and directed (for all prac
tical purposes) by the semi-autonomous federal agencies,
the largest of which is Ferrocarlles Nacionales de Mexico,
controlling two-thirds of the national railways. On June
30, 1966, about 1^,700 miles of tracks were in use car
rying an estimated 30 per cent of all freight moved in
Ao
Mexico. Its fixed-capital investments are financed by
^°E1 Mercado de Valores, No. *+9. 1966, op. clt.,
p. 1 6 .
319
TABLE 6
GROWTH OP THE HIGHWAY SYSTEM
(Thousands of Kilometres)
Year Paved Gravel Total
1940 6.4
3-5 9.9
1950
15.5
6.0 21.5
1958 25.6 6.4 32.0
1964 33.4 17.0 50.4
1965 35-3 25.5
60.8
Source: Howard F. Cline, Mexico. Revolution to
Evolution (New York; Oxford University Press, 19^3),
p. 64 for 1940, 1950, and 1958; Banco Naclonal de Mexico,
Review of the Economic Situation of Mexico. No. 490,
September 1966, p. t, for 19^4 and 19^5•
320
NAFIN, National Financiera, either from its own reserves,
by loans from the World Bank, or the Import-Export Bank
handled through NAFIN, National Financiera.
Hydraulic Programs
Irrigation has been one of the successful public
expenditures in Mexico, and has progressed quite well
since the beginning of the Aleman administration. Pro
grams have included the solving of ancient problems of
insufficient water in dry zones (northern Mexico), floods
in others, and also development of large new habitats en-
Al
dowed with communications networks and schools.
In keeping with the goal of industrial growth,
President Aleman raised the office of national irriga
tion to Cabinet rank as the Ministry of Hydraulic Re
sources. Under the new organization, many crops were
greatly expanded by new irrigation projects under the
hydraulic Commission in cooperation with state and local
authorities. A large number of the projects are located
in the northern desert and semi-desert areas, including
two large dams— the Falcon and the Miguel Hidalgo. The
southwestern part of Mexico has also received a substan
tial share of multi-purpose irrigation projects— in addi
tion to the construction of the Aleman and Mai Paso
^Cllne, o£. clt.. p. 6 8 .
321
A?
Dams. The completion of these projects, especially
in newly developed territories, add not only Important
economic resources, but through the new highways, link
these regions with market outlets.
Chapter III discussed the topography of Mexico,
indicating its mountainous conditions and the sparse
and irregular rainfall pattern. All of this combines
to limit the area that can be cultivated to 7^ million
acres— or about 15 per cent of the total land area of
the country. In 1965 there were about hZ million acres
under cultivation, or about 39 per cent more than in
1955* of which 9*011,000 acres are under irrigation— a
A3
gain of 25 per cent over the last decade. ^
The expansion of irrigation plus the production
and use of fertilizers has brought Mexico closer to self-
sufficiency in food-stuffs; however, more extensive ir
rigation and the use of agricultural technology will be
required in order to meet the 3*2 rate of growth in pop
ulation. Moreover, about 52 per cent of the country’s
total employment is engaged in agriculture, livestock-
raising, forestry, and fishing. These groups produce
h.9
Ibid.. p. 71.
A3
El Mercado de Valores, No. ^9* 1966, op. cit.,
p. 1 1 .
322
only 17.3 per cent of Mexico's 1965 Gross National Pro-
i|A
duct (at constant 1950 prices). Therefore, advancement
in the various agricultural areas is imperative to attain,
among other objectives, balanced growth.
Expenditures on irrigation are included in the
Federal budget under "Development and Conservation of
Natural Resources." Recent budget allocations indicate,
for example, 563 million pesos in 1961, and 1,2 01 million
for 1965. Development allocations include the construc
tion of 38 small dams to irrigate an additional 124,000
hectares (256,804 acres) A portion of these expendi
tures are met through international loans made to the
Federal government, the most recent (April 28, 1967) by
the Inter-American Bank in the amount of 31*1 million
dollars to finance new irrigation of about 148,283 acres.
These loans appear in the Receipts of the Federal Govern-
47
ment under Capital Receipts: "Proceeds of Loans." '
44
Ibid.. p. 12.
4*5
Banco de Mexico, Review of the Economic Situa
tion of Mexico. September, 1966, p^ 5" *
46
El Mercado de Valores, Naclonal Financiera.
No. 19. May 8, 1967, p. 395*
47
El Mercado de Valores, No. 49, 1966, op. cit.,
p. 29*
323
Tourism and Economic Growth
Tourism is an Important contribution to the
nation*s growth for several reasons. Most of the tour
ists are Americans; thus Mexico acquires dollars and one
of its largest contributions to foreign exchange, much
needed for the importation of machinery and machine parts.
Tourists not only spend dollars in Mexico on a variety of
services, but export (take home) a considerable amount
of goods, especially from the border towns. Tourist trade
promotes the expansion of capital investments in the
hotel, restaurant, and amusement industries, as well as
adds income to services workers— all of which has an in-
come-multlplier effect on the domestic economy.
Tourism is promoted by the Federal government and
is recorded under the classification of Economic Develop
ment in the Federal budget. The promotional literature
is heavily concentrated in the United States* mass media
of communication, selected journals, and colleges and
universities. In 1965* about 1,395,000 tourists visited
the interior of Mexico (not border towns) as compared
with 1,239,000 in 196^.
Border trade Is a peculiar and an Important phe
nomenon, but in this connection it is essential to qualify
the conventional meaning of the terms "exports" and "im
ports" on this area of trade as defined by Mexico*s of-
324
flclal statistics. Generally, goods taken from border
towns to the United States are not classified as exports;
they are regarded as tourist*s revenue. In other words,
much of what is classified as tourist revenue in the
Mexican balance of payments consists of purchases by
United States residents of goods and services in the
Mexican border towns. Some part of these purchases,
under other circumstances, would be unquestionably clas-
48
sified as Mexican exports. By the same token, goods
brought into the border areas from outside Mexico are
not registered as imports— they are regarded as Mexico's
"tourist expenditures" abroad.
The importance of tourist expenditures to the
Mexican economy can be measured in another way. Accord
ing to government reports, gross receipts from tourism
and border trade averaged about 38.2 per cent of total
foreign exchange receipts on current account for the
years 1961 through 1965.^ Table 7 shows tourist rev
enue as a per cent of total receipts in the Current
Account for the years indicated.^0
48
Raymond Vernon (ed.), Public Policy and Pri
vate Enterprise in Mexico (Cambridge, Mass., Harvard
University Press, 1964), pp. 247-248.
^E1 Mercado de Valores, 49, 1966, ojd. cit.,p. 16.
^^Vernon (ed.), loc. clt.
325
TABLE 7
TOURIST REVENUE AS A PER CENT
OF TOTAL FOREIGN EXCHANGE
REVENUES
Year Percentage
19^0
23.5
19^5
22.1
1950 28.7
1955
3^.8
I960 ^ . 1
Source: Vernon (ed.), loc. clt.
32 6
The above data clearly Indicates the growing im
portance of tourist expenditures. It also reveals the
growth of American affluence during the post-war years.
Table shows that American tourists' border trade
doubled from 1955 to 1965» and total tourist revenue
more than doubled during the same period. Too, the net
receipts increased about 100 per cent during 1955-1965.
Tourism Is also Instrumental In promoting Mexico's
infrastructure. American tourist automobiles place
heavy demands for highway improvement and expansion. To
*
this end, the government has initiated an extensive high
way development program to facilitate tourist travelling,
and at the same time benefit agriculture, cattle raising,
and allied activities. Also, as noted, highway expansion
promotes the construction of additional hotels and res-
^1
taurants at strategic highway junctions.J
VII. SUMMARY AND CONCLUSIONS
The present chapter traced the original revolu
tionary ideology, in economic terms, from one based on
agrarian reform to emphasis on industrialization, a meas-
o
^ Banco de Mexico, Review of the Economic Situation
of Mexico. October, I960, p.
TABLE 8
TOURISM AND BORDER TRADE ^1^
(Millions of Dollars)
Year
No. of
Tourists
Visiting
Interior
(Thousands)
Receipts
Expenditures by
Mexicans Outside Mexico
Net Receipts
from Tourism
and Border
Trade
From
Visits to
Interior
From
Border
Trade Total
Border
Trade Other Total
1955
572 $118.1
$261.7
$379.8 $151.2 *16.7 $167.9 $211.9
1961
859
164.0
392.7 556.7
242.0
^5.5 287.5
2 6 9 .2
1962
958 178.6
406.7 585.3
244.6
65.5
310.1 275.2
1963
1,081 210.6
445.9 656.5
265.2
84.3
349.5
307.0
1964
1,239
240.6
463.3 703.9
2 7 6 .6 100.2 376.8
327.1
1965 1,395
277.6
504.5
782.1
294.3 119-3
413.6
368.5
(1) Border trade Includes expenditures of tourists crossing the border on 72-hour
permits, purchases and sales of merchandise on a small scale and salaries and wages of
individuals employed on the opposite side of the border from their place of residence,
and excludes export and import transactions in commercial quantities. ^
r o
Source: El Mercado de Valores, Nacional Financiera S.A., Suplemento Especial al
No. 49, Dec ember 5» 1966,
328
ure furthered by the tecnicos, and fully implemented in
the post World War II years. The conflict between agrar
ian reform and industrial development centered on the
kind of participation, direction, and role the govern
ment would undertake. With the assistance of a stable
political process, insured by the single-party system,
£
the central government under Avila Camacho (19^0-19^6)
undertook a strong leadership in the Industrial develop
ment of Mexico.
The private sector received considerable encour
agement from a variety of government measures, among
them, public credit, subsidies, and tariff protection.
Moreover, the government made substantial outlays for
an Infrastructure, and for public enterprises, such as
petroleum, chemical industries, electric power, and
communications. Most of the capital funds for these
undertakings came from the development bank, the Nacional
Financiera, which obtained its capital sources mainly
from foreign private financial Institutions.
Moreover, through government encouragement, the
private sector received financial impetus from direct
and Indirect foreign Investments which spurred domestic
economic development. However, as mentioned In the in
troduction to this chapter, Inflation made significant
329
inroads as a result of the heavy shift from consumer
goods production to capital formation. This was par
ticularly true during the 19^0* s and 1950's. The cen
tral government, on the other hand, initiated monetary
measures such as central bank selective controls, to
gether with income tax reforms, not only as a source of
needed revenue, but also as anti-inflationary means by
adjusting the nation's ability to pay taxes commensurate
with.the growth of the Gross National Product.
I
t
CHAPTER VIII
FISCAL AND MONETARY DIMENSIONS
OF RECENT ECONOMIC GROWTH
IN MEXICO
I INTRODUCTION
This chapter is concerned with the characteris
tics of taxation and tax reform; recent trends in govern
ment expenditures, based on a budget classification which
also serve to indicate the social and economic policy
initiated by government; and budget administration, en
tailing the budget-making process, its difficulties, and
degree of effectiveness.
The shift to industrialization during the 19^0's,
and in particular the emphasis placed upon industrializa-
9
tlon by Avila Camacho, Aleman, and Ruiz Cortines, brought
forth a gush of social overhead capital expenditures to
gether with considerable growth In capital formation in
the private sector. On the other hand, this process
placed heavy emphasis on the federal budget, as well as
the need for larger government revenues, which, prior to
19^0, the government obtained mainly from Indirect taxes.
331
Yet, it was noted earlier that President Cardenas had
already begun the modern practice of deficit spending as
a means for expanding economic expenditures.
The tax reforms of 1953 and later 19&3 have made
income taxes one of the major sources of government rev
enues for meeting the ever growing fiscal budget. More
over, direct taxes have had an increasing role in fiscal
policy as a measure for restraining the inflationary pres
sures of the 1950's - However, some of the deficiencies of
the budget making process, and administration, have re
duced fiscal policy as a significant instrument for coun
ter cyclical measures. Consequently, since the 19^0's,
and with the shift of resources from the consumer sector
to capital formation, the Mexican government has had to
place emphasis on monetary and selective controls as a
means of combating persistent inflation, and as an impor
tant policy for promoting the economic growth of the
nation.
II. CHARACTERISTICS AND TRENDS
IN GOVERNMENT TAXATION
Tax policy can be used as a regulatory measure to
promote or restrict trade and consumption; it can also be
used as a fiscal necessity. In the past, Mexico has not
332
done very well in the use of taxes as a means for promot
ing internal growth. Mexico has always been too hard
pressed to obtain moneys for its essential needs, and un
til recently, in 1962 and 1965. the government has not
made a real effort to initiate fiscal reform in order to
Increase fiscal revenues in keeping with the growth of
the Gross National Product, and meet the growing needs in
social expenditures and infrastructure. Apart from the
income tax initiated by Calles, the early Revolution add
ed nothing substantially to the system Inherited from the
Diaz regime; but during the years 19^0-1950* "the govern
ment carried on an extensive tax exemption program in or
der to promote growth.
As late as 19^0, Indirect taxes— such as import-
export duties and tax stamps--were the means of nearly 85
per cent of total revenue; by 19^3t they were contributing
less than 50 Pei* cent. The recent growth of public reve
nue has been due not only to growth of the GNP, but to
some improvement in the collection system, higher tax
rates, and the introduction of new levies (in 1953). The
major direct taxes are laid on income, excess profits,
and capital transfers. The principal indirect taxes
come from foreign trade, gross-sales taxes, and federal
333
stamp taxes.'*' Table 9 itemizes the main sources of fed
eral revenue for 1959-1961. Table 9 Indicates a substan
tial increase of 27 per cent in income tax returns from
1959 to 1961. For the same period, business taxes rose
28 per cent, with gross sales taxes rising 32 per cent.
Export duties declined, however, from 977 to 807 million
pesos. Government reports Indicate that the decline was
due to export exemptions as a means of strengthening the
competitive possibilities of Mexican exports on foreign
2
markets. Yet, other factors also seem to be Instrumental
to the decline in export revenues. Personal income and
business tax increased as the absolute amount of the do
mestic national product also Increased. By the 1960’s,
however, Mexico began to show symptoms of stagnation due
to internal and external factors.
During the 19*4-0Ts and 1950’s, Mexico developed her
export trade of raw products as part of the measure for
economic growth. The post war period and the Korean War
afforded a large expansion of her export trade to the
United States, European, and Japanese markets. Increases
1
Frank Brandenburg, The Making of Modern Mexico
(Englewood Cliffs, N.J.: Prentice-Hall, Inc., 196*4-),
p. 218.
2 .
Mexico, 1963, Banco Nacional De Comercio Exterior,
S.A., Mexico, D.F., p. 231.
TABLE 9
EFFECTIVE FEDERAL TAX REVENUES
(Millions of Pesos)
Tax
1959
I960 1961
Income Taxes 3.205.8 3,628 4,070
Natural Resources
229.5
261 296
Production and Commerce 1,188.4 1,314 1.532
Gross Sales Tax
978.3
1,102 1,286
Imports 1.569.6
1,753
1,641
Exports 976.7 932 807
Other Sources Specified in
the Revenue Law
1.055.7 1.977
1,604
TOTALS 9,204.0
10,967
11,236
Source: Bank of Mexico Annual Report for 1961.
335
In foreign exchange gave Mexico the means for Importing
Industrial machinery and parts in addition to foodstuffs
she lacked for feeding the growing industrial centers.
Internally, during the years in question, Mexico was in
the process of expanding basic capital, promoting domes
tic industries for self-sufficiency, and developing an
infrastructure. The hydraulic programs, electric power,
and highway building made for successful development of
important agricultural crops, as well as metal ores. Mex
ico did well. The growing surpluses became the basis for
export trade and the much needed foreign exchange.
By the late 1950’s, the export market weakened,
especially In cotton and coffee, which accounts for 30
3
per cent of the country's exports. During the same per
iod, cotton production rose from ^0^,000 metric tons In
1955-56 to 529,000 metric tons In 1958, while the export
value of cotton dropped during the same period from 263
million to 190 million dollars as export prices deterior
ated by 9 per cent. Outstanding among the factors which
3
Raymond Vernon, The Dilemma of Mexico's Develop
ment (Cambridge, Massachusetts: Harvard University Press,
1953), pp. 180-81.
United Nations, Economic Survey of Latin America,
1958, p. 78.
336
influenced the price decline was the weakening of demand
on the part of the leading Importers, namely, Japan and
the countries of Western Europe.-* The cotton market,
moreover, has not shown any marked improvement in the
I960*s. The data in Table 10 show the export value of
cotton in recent years.^
Coffee met with similar difficulties; its decline
in export value has followed the same pattern as cotton.
Only the export market for ferrous and nonferrous metal
ores showed promise of much growth: according to projec
tions, anticipated growth rates of 5 to 6 per cent were
7
typical for such products. It is too early to be de
cisive, however. Mexico has the necessary capital devel
opment to meet output quotas, but the future conditions
of the international markets are at this time difficult
to determine.
Thus, as a means for financing the budget, Mexico
will have to turn to internal sources, particularly since
- *Ibid.. p. 136.
^E1 Mercado de Valores, Naclonal Financiera S.A..
Suplemento Especial al No. ^9. 5 de Diciembra, 1966,
p. 18.
7
'Vernon, op. cit.. p. 181.
337
TABLE 10
THE EXPORT VALUE
OP COTTON
Year Amount
(Millions of Dollars)
1961 163
1962 221
1963 199
196^
173
1965 215
Source: El Mercado de Valores, Naclonal
Financiera S. A ., Suplemento
Especial No. ^-9. 5 d© Deciembre,
1966, P. 18.
338
she Is providing exemptions in drder to promote export
markets. The capacity and willingness to tax have been
limited by many circumstances, according to Dr. Vernon,
for example the long tradition of tax evasion and corrup
tion, technical limitations in the tax apparatus, and the
justifiable fear that high taxes will either induce capi
tal sight or generate widespread public unrest, depending
8
on their form. All of this indicates as noted previous
ly, that fiscal policy has not been a very effective tech
nique for financing growth and control. Monetary policy
has been the major measure and weapon for growth purposes.
Moreover, the Mexican fiscal system is less effective as
an instrument of policy because the responsiveness of tax
revenues to increases in gross national product Is marked
ly lower than in the advanced countries whose systems of
9
taxation are more progressive.
In order to increase tax revenue, the 1962 tax
amendment set a new rate of 3 per cent for income in ex
cess of 15.000 pesos ($1200.), and goes as high as 15 per
cent for Incomes in excess of 120,000 pesos ($9600.).10
8Ibld, p. 185.
^Dwight S. Brothers and Leopold Solis, Mexican
Financial Development (Austin: University of Texas press,
1966), p. 52.
■^Mexico, 1963. Banco Nacional De Comercio
Exterior, S.A., Mexico, D.F., p. 231.
339
The 1965 tax amendment Increased the tax rates on income
from Industry and commerce--up to 42 per cent on incomes
in excess of 500,000 pesos ($40,000.), and 25.2 per cent
on income less than 500,000 pesos ($40,000.) for those
engaged exclusively in agriculture, stock breeding, or
fishing.11
The above tax reforms may set the tax revenue
more In keeping with the rate of growth of the GNP. The
ability and capacity to acquire larger revenues, however,
will depend on further growth in real terms, together
with more equitable distribution of income, the future
attitude of the business community, and the government's
monetary policies.
Even with a reasonable future growth rate, fed
eral revenue can finance expenditures for promotion of
industry and commerce and infrastructure. In the past,
federal revenues have ranged between 8 per cent and 10
per cent of the GNP, as compared with a range of 20 per
cent and 30 per cent for advanced nations. It Is be
lieved that with fiscal discipline and political respons
ibility, Mexico can afford a higher rate of federal taxes,
not because of economic propriety, but because of the
11
Walter H. Diamond, Foreign Tax and Trade Briefs
(New York: Mathew Bender, 1967), p. 15-
3^0
pressing need to upgrade fiscal techniques. Together with
monetary policy, Mexico would then be able to promote
economic stability as well as economic development. Table
11 shows sources and disposition of government income in
1963.
III. CHARACTERISTICS AND TRENDS IN
GOVERNMENT EXPENDITURES
In order to determine the social and economic
policy initiated by the government, budget expenditures
of a social nature deal with education, public health,
social and cultural aid, et cetra. These are long term
and therefore it is very difficult to measure the input
and output effectiveness. An irrigation project can be
built in a year or two and its effectiveness in terms of
production yield of cotton can be measured, but the train
ing of a student may take five times as long, and there
is no assurance of concrete results. An honest govern
ment with a dedicated social philosophy can eventually
promote the education and social responsibility necessary
for its citizens to engage in an orderly political and
social process. A nation may attain a climate of social
and political stability— so essential to economic develop
ment; yet as with social cost, its results are difficult
3^1
to measure in a material sense. Economic expenditures
(social overhead capital), however, have the quality of
establishing concrete relationships and thereby are sub
ject to measurement. Thus, Professor Wilkie has broken
down federal expenditures into three categories: econom-
1 2
ic, social, and administrative. Table 11 shows some
of the budget categories under each expenditure classifi
cation.
Two notations on administrative expenses are es
sential, according to Professor Wilkie. Government pen
sions are placed in the administrative expenditure clas
sification in order to establish consistency in the glob
al percentages for administrative expense. The public
debt is also classified under the administrative expense
because, while debt redemption is excluded from budgets
analyzed by economists, especially in advanced nations,
it is included in the budget of underdeveloped nations be
cause they are dependent on foreign capital and are re
quired to pay their debts to have good standing among
creditor nations and international investors.
The Mexican government publishes a functional bud
get which presents expenditures according to function, for
12
James W. Wilkie, The Mexican Revolution (Berke
ley: University of California Press, 19&7T. pp. 10-12.
TABLE 11
342
THE FISCAL PESO IN 1962
Revenue Expenditures
Income Tax 34 Social Welfare
35
Commerce and. Industry 24 Communications--
Transport 22
Foreign Trade 22
Conservation Nat
Fees, Profits 10 ural Resources 10
Loans
5
Army and Navy 10
Other
5
Public Debt
9
Admini stration
7
Promotion of
Industry
7
Source: Mexico, 1963» Banco Nacional
De Comercio Exterior, S. A.,
Mexico, D.P., p. 231.
example, Communications and Transportation, Development
and Conservation of Natural Resources, Education and Cul-
13
ture, et cetra. Table 12 however, affords a percen
tile analysis of the three categories between various
years and administrations, thus revealing the economic
and social emphasis and policy by the various presidents.
Table 13 was rearranged by this writer from tables pre-
14
sented by Professor Wilkie.
Table 12 sheds light on the economic, social,
and administrative policies by presidents from Cardenas
to Lopez Mateos. Economic expenditures, or social over
head capital, began to expand rapidly with the Cardenas
Administration when particular emphasis was placed on
agrarian reform, irrigation, expansion of agriculture
credit, some highway construction and public works. How
ever, the promotion of Industrialization, price supports
et cetra, were not emphasized by Cardenas. His actual
budget indicates a larger percentage for administration
over economic and social expenditures. This category
could have been lower still (and a larger share going for
13
El Mercado de Valores, Naolonal Flnanclera S.A.
Suplemento Especial al No. ^9. 5 de Diciembre, 1966^ p.30
^^llkie, o£. clt., p. 3 2 .
TABLE 12
AVERAGE PER CENT OP FEDERAL BUDGETARY EXPENDITURE
BY TYPE OF EMPHASIS AND PRESIDENTIAL TERM
Presidential
Term Economic Social
Adminis
trative Total
193A-19A0 Cardenas
Projected
30.5
23.0 46.5 100
Actual 37-6
18.3
44.1 100
1941-1946 Avila
Chamacho
Projected
30.7 23.5
45.8 100
Actual 39.2 16.5
44.3
100
19^7-1952 Aleman
Projected 39.2 18.6 42.2 100
Actual
51.9 13.3
34.8 100
1953-1958 Ruiz
Cortines
Projected 43.8 20.4 35.8 100
Actual
52.7
14.4
32.9
100
1959-1963
Lopez
Mateos
Projected 38.8 30.8 30.4 100
Actual 39.0 19.2 41.8 100
Note: Lopez Mateos' data covers only five years.
3^5
TABLE 13
CLASSIFICATION OF MEXICAN FEDERAL GOVERNMENT
BUDGETARY EXPENDITURES BY TYPE OF EMPHASIS
ECONOMIC EXPENDITURE:
Commerce and Industry
Communications and Public Works
Agriculture, Livestock, and Forestry
Agricultural Credit
Agrarian Department
Hydraulic Resources and Irrigation
Tourism
Investments in Trust Funds, Stocks, Bonds, Railways,
Electric Industry
SOCIAL EXPENDITURE:
Education and Physical Education
Indian Affairs
Public Health and Assistance
Potable Water and Sewage Disposal
Labor
Unclassified: Housing, Insurance Programs
ADMINISTRATIVE EXPENDITURE:
Public Debt (Including Redemption and Interest)
Military
Legislative
Executive
Judicial
Interior
Attorney General
Treasury
Unclassified: Government and Administration Pensions
Source: James W. Wilkie, The Mexican Revolution
(Berkeley: University of California Press', 1967), p. 13.
3U6
social purposes) if Cardenas had not raised federal employ
ee's wages, and government and administrative pensions.
Economic expenditures, which Include formation of
social overhead capital, rose steadily, reaching Its
highest peak during the Aleman and Ruiz Cortlnes regimes.
This was the era of the "great shift," from emphasis on
agrarian reform and agricultural development to Indus
trialization, and the expansion of the nation's infra
structure, public enterprises, foreign direct and Indirect
investments, and hence the nation's overall capital for
mation. This period marked a shift from the original
Ideology of the Revolution, from the type of spirit that
gave the Revolution Its original vitality, that Is, agrar
ian reform and social justice. And while contemporary
political speeches are generously peppered with the
principles of agrarian reform and social justice, Mexican
intellectuals insist that social justice cannot be left
altogether to the social process of the market mechanism.
In other words, the newer Interpretation of the revolution
has left behind a good portion of the rural population
and Indians of the hinterlands. Further reform and addi
tional social outlays will eventually sweep these sub
standard groups into the exchange economy, and thus raise
their standards of living to levels closer to those en
joyed by their urban cousins.
3U7
The Mexican Intellectuals do not deny the Impor
tance of industrialization, but for them the conflict is
one of emphasis. They are quick to point to the recent
threats of economic stagnation, as faced by the Lopez ad
ministration, as a result of imbalanced economic growth.
Table 14 shows a notable shift In percentage changes
from economic to social expenditures, thus revealing an
effort, it would seem, to restate the "ideals" of the
Revolution by Lopez Mateos, although the absolute amounts
in the three categories increased since, with the excep
tion of 1962, the budget increased in money terms.
The reason for economic stagnation in the late
1950's was not altogether the result of neglect of the
agricultural sector, although the intellectuals and those
faithful to the Revolution assert the government did not
continue with the reform In the Cardenas tradition. But
by the late 1950's, Mexico suffered from the success of
attaining an Impressive level of economic development
through a variety of stimuli, and Lopez Mateos wondered
where the next set of opportunities was coming from.
Thus, the 1959 to i960 budget showed an Impressive In
crease In all three categories of expenditures. But It
is noteworthy that in terms of percentages to total actual
budget, social and administrative expenditures increased
348
TABLE 14
DISTRIBUTION OP
NATIONAL EXPENDITURES
1900 to 1934
Expenditure Per Cent
Economic 19.8
Social 9.4
Admi ni strat ive 70.8
Total: 100.0
Source: Computed, by this writer from Table
5-2, Wilkie, o j d . cit . , p. 102.
3h9
substantially. Social expenditures rose to meet increas
ing needs in education, health, and social service, in
part, as a result of the alarming rate of population
growth. This shift was also an effort to establish "bal
ance" in social justice as seen by the lower percentage
15
of social expenditures in previous administrations, but
at the same time Lopez Mateos earned the distinction of
having the highest social cost in Mexico as indicated in
Table 12
Table 12 also reveals a marked increase in ad
ministrative expenditures. The more important reasons
are the upgrading of government pensions (from one to two
per cent of the budget) and payment on public debt. Lo
pez Mateos was concerned not only with domestic debt, but
foreign debt as well. In fact, the economic slowdown of
the late 1950's (reflecting a decline in inflation) pro
duced a change in the pattern of receipts and expendl-
tures. Thus, producing public deficits was character
istic of the late 1950's, 19&1, and 1963*
As a general review, Table 12 clearly shows the
government's dedication to economic growth by the marked
15Ibid, p. 91.
■^Brothers and Solis, o£. clt.. p. 168.
350
rise in economic expenditures since the Cardenas adminis
tration. It is also notable that, while social expendi
tures increased on the whole, the emphasis was consider
ably less as compared with the rise of economic expendi
tures; thus one of the ideals of the Revolution was giv
en secondary place--as explained in a previous discussion.
It is also notable that administrative expenditures de
creased in percentage during the Aleman and Ruiz Cortines
Administrations until the presidency of Lopez Mateos. In
sum, the federal budgets Increased quite substantially in
absolute money terms since 19^0, but there was a very
significant change in the type of federal expenditures.
The data in Table 12 presents the budgetary distribution
by types of expenditures during the ten administrations
mentioned, which may be compared with Table 1*4- .
There are other public expenditures besides those
of the federal budget. Table 15 illustrates chronologi
cally the per cent increase in expenditures by public en
terprises as compared with the decline in the percentage
rate of Federal expenditures. A good portion of the total
growth of the nation’s Infrastructure, therefore, came
from the important development of public enterprises as
witnessed during the 1950's.
The above data requires additional explanation for
351
TABLE 15
PARTICIPATING OF EXPENDITURES BY
GOVERNMENT AGENCIES AND PUBLIC
ENTERPRISES IN MEXICO IN SELECTED
PERIODS, 1939 - I960
( Per Cent of Total Public Gross
Investments)
Federal Rest of
Public Sector
1939-1940 56.1
^3.9
1944.1945
60.8 39.2
1949-1950 46.2 53.8
1954-1955
44.9
55.1
1959-1960 ^7.0 53.0
Source: Everett E. Hagen, Ed., Planning
Economic Development (Homewood,
Illinois; Richard D. Irwin, Inc.
1963), P. 156.
352
several Important reasons: (1) the size of the average
administrative budget from 1900 to 193^ was largely mili
tary outlays, for example, 70 per oent in 1917 during the
Carranza regime; (2) the de-emphasizing of military ex
penditures revealed the political and social stability of
the country, particularly since the single-party system;
(3) the shift from administrative to economic outlays
marks the new role of government in the economic develop
ment process; and (4) the low military budget, begun by
President Cardenas, is an indication of the loss of the
power, control, and influence the generals have had on
the political and social affairs of the country.
Table 16 presents the average per cent of mill-
18
tary expenditures in the total budget since Carranza.
Mexico is fortunate that she does not face inter
national conflicts or hostile powers that would threaten
her national security at this time. If such were the
case, and if the military budget were raised to just 15
per cent of the total budget of 196*+, it would mean a re
allocation of about 2,829 million current pesos, a condi
tion that would bring about adverse economic consequences.
There are several of these possibilities. If the budget
—
Computed by this writer from Table 5-2, Wilkie,
op. clt. , p.102.
353
were increased with the possibility of raising additional
taxes in order to meet the additional military expendi
tures, the political climate of today is likely to force
the government to finance at least part of it with a bud
get deficit, thus making for inflationary pressures un
less more strict credit measures were taken— which would
also bring political repercussions unless the needed na
tionalistic fevor could be promoted.
On the other hand, if the budget were not in
creased economic and social expenditures would suffer a
reduction, thus affecting economic development. Whether
Mexico has a budget deficit, or the latter is the case,
and unless the country receives outright military gifts
from a friendly power (which might conjure international,
political, and economic complications), military equipment
with advanced technology would have to be purchased
abroad. In this case Mexico’s balance of payments would
be affected adversely, which could well lead to a reduc
tion on imports of foodstuff and/or machinery and parts
(unless Mexico could obtain international credit, which is
again another dellmma). In such an event, shortages of
consumer goods would Invite Inflationary pressures, as
well as a reduction in the nation's capital formation.
Undoubtedly, there would be other and more com-
TABLE 16
AVERAGE PER CENT OF MILITARY EXPENDITURES
TO ACTUAL TOTAL BUDGET
Years Presidents Per Cent (Actual)
1917-1920 Carranza
55-3
1921-192*4- 0 bregon
43.9
1925-1928 Calles 31.2
1929-193*4-
Three Presidents 29.0
1935-19*4-0 Cardenas
17.9
19*4-1-19*4-6 Avila Chamacho 16.6
19*4-7-1952 Aleman
9.7
1953-1958 Ruiz Cortines 8.0
1959-1963
Lopez Mateos 6.0
19644-
1 1 1 1
5.7
1965-
Diaz Ordaz
* 4 - *5
Source: The figures for 196*4- and. 1965 were computed
by this writer from a government report; 196*4- is assumed
to be actual, while 1965 is computed from projected budget
figures (El Mercado de Valores, No. *1-9* 1966, op. clt..
p. 30).
355
plex economic consequences, particularly of a long-run
nature. But this discussion Is merely an illustration of
the possible effects a higher military budget might have
on social and economic expenditures, and also to indicate
Mexico's good fortune under the present political-inter
national climate, which would otherwise impede her econom
ic development as well as add to her internal problems.
IV. BUDGET POLICY AND ADMINISTRATION
The federal budget of Mexico is the most impor
tant component of government expenditures, since the
state and local governments have only a limited access to
sources of income. Whereas real income has Increased In
recent years, local government has received a progres
sively smaller share of total national revenues. The
federal Income stands today at about 70 per cent of all
receipts. This Important factor raises the question of
how to analyze policy (and decision making), as reflected
in actual expenditures, since the federal government is
an organized body with resources and the desire to effect
social and economic change. Students of social theory
are soon faced with the realization that Mexico's budget
system is the product of its political system. It is
essential, therefore, to mention some of the significant
356
features of power and organization in government.
The Budget-making process.
The Constitution of 1917 adopted relatively de
tailed budget rules, but the early post-revolutionary
years saw the too familiar pattern of informality and
"personalism" in the presidency. Each of the first three
presidents who held office under the new constitution
took upon himself authority to adopt budgets by decree,
usually on the grounds that congress had failed to supply
necessary fiscal legislation before the start of the fis
cal year. A practice followed, where budget Items which
originally had been based on scarcely more than inspired
guesses were transferred from agency to agency with little
or no administrative controls, much less with any effec-
20
tive legislative post-audit.
Eventually, and partly for expediency, the bud
get-making task by law became the exclusive Initiative
21
of the presidency; and once the budgets of government
Income and expenditures have been sent to Congress, usual
ly during the last two weeks of the sessions, almost no
?o
Eobert E. Scott, "Budget Making In Mexico,"
Inter-American Economic Affairs. IX, no. 2, Autumn, 1955t
pp. 4-5.
21
Ibid, p. 6.
357
discussion of their terms is offered and no attempt is
made to discover the criteria upon which allotments were
22
assigned, much less changes made in their content. In
1958, President Lopez Mateos set up a Secretaria de la
Presldencia. This organization Is responsible for the
planning, coordination, and control over the general pol
icy and budget-making activities of all national govern
ment agencies, including independent bodies and state-
23
national units.
After preliminary budget policy has been decided,
the budget Is prepared by the Dlrecclon General de Ingres-
sos, and followed by a review in the accounting offices
of the Dlrecclon, after which the budget is sent to the
Secretaria de la Presidencia. As a further accounting
check and control, each of the federal dependencies must
submit an accounting report on the departmental budget
expenditures. Eventually, an actual budget is arrived
at, and, not surprisingly, there is a substantial differ
ence between the actual and the original projected budget.
^Robert E. Scott, Mexican Government in Transi
tion (Urbana: University of Illinois Press, 1959).
p. 256.
23
Ibid, p. 256.
Scott,"Budget Making in MexicoV pp. 16-17.
358
Problems of Budget Analysis
The spirit and social ambitions of the Revolution
have Institutionalized the government process, the prob
lem of charismatic government— how to transfer power from
one leader to another— has been replaced by a more mech
anistic, less personal, constitutional system. But the
tendency towards personallstic Identification with a Pres
ident still persists to some degree. It may be that this
mild type of leader direction is still necessary in a
country where the Institutionalized political process has
not reached the necessary degree of social maturity among
some factions for minimizing political and economic strug
gles which may obstruct desired goals.
Writers on planning and such political theory as
Robert J. Shafer and Robert E. Scott, contend that the
new budgetary techniques In Mexico are quite adequate, but
that there Is a tendency for political decisions to weaken
25
the operational effectiveness of the budget. James W. t
\
Wilkie asks how the style of each president and period be
pinned down. Are policies undertaken at the whim of the
President, or a strong man in the political party organiza-
26
tlon? Professor Scott, however, sees a relatively demo-
^•^Robert Jones Shafer, Mexico— Mutual Adjustment
Planning (New York: Syracuse University Press, 1966),p.16.
Wilkie, o£. clt.. p. 4.
359
cratic official party in which Interest groups can influ-
27
ence the President. On the political side, this is a
realistic conclusion in view of the presidential projected
budget, as compared later with the actual budget.
Commensurate with the above contentions, it is
not surprising that some observers feel that most of the
problems lie in the fact that the formation and execution
of the budget are almost a purely executive process. This
seems to assume a technical deficiency in the relationship
between the two branches of government entirely, rather
than possibilities also arising from the basic socio-polit
ical environment. Moreover, there is the assertion that
budgetary planning as a means of getting continuity of pro
grams will be difficult as long as the budget is subject
to personallstic relations between the President and his
followers; hence, it Is charged that problems are attack-
28
ed in "six-year spurts." But efforts to Improve this
situation have been taken by President Lopez Mateos (1959)
when he established the Secretaria de la Presidencia for
the purpose of planning, coordination, and review control
over policy and budgetary activities of all national gov-
2^Scott, o£. clt., pp. 262-263.
28
William P. Tucker, Mexican Government in Transi
tion (Minneapolis: University of Minnesota, 1957),
pp. 1^9-15^.
360
eminent agencies, as already mentioned. Thus, the mores
of personalism may still linger, but to a much lesser de
gree as compared to a decade or two ago.
Data Problems. Problems of budget analysis lie
in other areas as well. The lack of adequate recorded
data has been a perennial problem, but this has been im
proved since I960. Budget studies made in the late for
ties have not examined the changing functions of agencies
in order to separate the budget into meaningful categor
ies which have historical continuity. There is also the
problem of sources of budget data. At the start of the
fiscal year, the projected budget is given wide currency
in newspapers and pamphlets. The actual budget is printed
after the fiscal period in limited addition which is not
readily available in Mexico, let alone outside the coun-
29
try. Consequently, analysis of expenditures are gener
ally on the basis of projected budgets, and it is not sur
prising therefore, that even reputable writers such as
30 31
Howard F. Cline and Oscar Lewis have compared project
ed budgets of one year to actual budgets of another. This
29Wilkie,_ op. clt., p. 5.
30
Howard F. Cline, Mexico, Revolution to Evolution
19^0-1960 (New York: Oxford University Press, 1963).
p. 238.
31
Oscar Lewis, "Mexico Since Cardenas," Social
Change in Latin America Today (New York: Vintage Books,
1960) , ”"pp ._500-301.
361
also holds true of some international research agencies
which in the past have inadvertently made the same compar
isons .
Unclassified Expenditures. There has been another
difficulty. Budget analysis has been hampered by a broad
budget category entitled erogaclones adlclonales (unclas
sified expenditures). This classification was created in
19^7. Until recent times it has cut across lines, while
the expenditures have been between 15 to 23 per cent of
32
the total. Writers have usually lumped this category
as "general expenditures." This has prevented an analyti
cal understanding of policy behind some of the budget ex
penditures. The government expenditure report by Mercado
de Valores (Nacional Flnanciera, No. ^9, December 5.
1966), however, has expanded the categories for 1961-196^,
with 1965 and 1966 as projected budgets. Each major cate
gory includes an "other" classifications as a per cent of
total expenditures and found the 1961 relation to be 9-7
per cent, while the 1966 projected budget shows a relation
of 8.3 pel* cent. Thus, recent expenditure budgets afford
a better government policy analysis and continuity as well.
Budget Control. Other improvements in budget con-
32Wilkle, op. clt., p. 238.
trol have been made; this Is true in the case of autono
mous public enterprises whose budget expenditures do not
appear in the federal budget. During the 1950's the auto
nomous and decentralized agencies had a free reign in
spending with funds which to a large extent were obtained
from foreign borrowing. Moreover, there was a lack of
coordination between the federal budget and the budgets
of the public enterprises, and thus an obvious conflict
between monetary stability and economic development. Pres
idential control over the expenditures of public enter
prises had diminished since the close of the Buiz Cortines
33
regime (1952); consequently abuse of antonomous autho
rity by the tecnlcos was growing steadily. Budget control
and reform by the autonomous enterprises did not take
place until after the election of Diaz Ordaz, the current
President. In 19^5* the new law brought decentralized and
mixed public and private agencies under the control of
projected and actual accounting by the Mexican Treasury
3^
Department.
-^Raymond Vernon, The Dilemma of Mexico's Develop
ment (Cambridge, Massachusetts: Harvard University Press,
1953), p. 119.
3^
Wilkie, loc. cit.
363
Significance of Projected and Actual
Budget at Current and 1950 Pesos
Table 17 has been arranged from the reports of
Mexico’s Trlmestre de Barometros Economlcos, and Compen-
dio Estadistico. The price Index,of course. Is identical
with the figures in the original report. The horizontal
lines were drawn to denote five presidential periods,
namely, those of Lazaro Cardenas, Manuel Avila Camacho,
Miguel Aleman, Adolfo Ruiz Cortines, Adolfo Lopez Mateos,
and Gustavo Diaz Ordaz.
Price index. Table 1? presents budgets in current
pesos as well as in 1950 pesos, based on the price index
for Mexico City. This index was prepared by the Ministry
of Industry and Commerce covering only 50 articles. An
other wholesale price index is computed by the Banco de
Mexico including 210 items which is not satisfactory to
some writers because it seems to understate the impact of
Inflation on the masses, and overstate the cost of social
35
and economic change. ^ Still, the Mexico City price index
was used in Table 17 since the capital city is the key
producer and distributor of manufactured goods in Mexico.
All goods purchased in Mexico are based upon the price
levels in the capital; nonetheless the question is raised
■^Wilkie, o£. clt.. p. 21.
364
TABLE 1?
PROJECTED AND ACTUAL BUDGET, 1934-1963
Year
Millions of
Current Pesos
Price Index
(1950 = 100)
Millions of
1950 Pesos
Projected
Budget
Actual
Budget
Projected
Budget
Actual
Budget
1935
276 301
24.9
1,108 1,208
1936 286 406 26.4 1.083 1.538
1937 333 479 31.3 1,065 1.530
1938
419
504
32.7
1,280 1.541
1939 445
582 33.6
1,325 1,733
1940 448 6 04 33.8 1,325
1,786
1941 492 682
35.9
1,370
1,899
1942
555 837 39.7 1.397
2,108
1943 707
1.076
47.5 1,489
2,264
1944 1,101
1,453 60.9
1,808 2,386
1945 1, 004
1.573
67.O
1,499 2,347
1946 1,200
1,771 78.5 1,529
2,256
1947 1,665 2,143
80.1
2,079 2,675
1948 2,300
2,773
85.0 2,706
3,263
1949 2,550 3.741 90.0 2,883 4,156
1950 2,746 3.463
100.0 2,746
3.463
1951
3,102 4,670 120.0 2,572 3.872
1952 3.996 6,464
132.5
3,016
4,879
1953 4,158 5,^90 135.2
3,075
4,o6l
1954 4,828
7.917
145.6 3,316
5,437
1955
5.681
8,883
168.0 3,382 5,286
1956 6,696 10,270
178.3 3,756 5.760
1957 7.578
11,303 189.3 4,003 5.971
1958 8,403 13.288 198.0 4,244
6,711
1959
9.386 14,158 200.0 4, 674
7,051
I960 10,251 20,150 212.0
4,829 9,491
1961 11,042 20,362 214.0
5.155
9.506
1962 12,320
20,219
217.2 5,672
9,309
1963
13,801
20,295
221.2
6,239 9.175
Source: James W. Wilkie, The Mexican Revolution
(Berkeley: University of California Press, 1967), pp.
22-23.
365
as to whether the index in question is capable of measur
ing the level at which rural Mexico can subsist. On the
other hand, if research analysts are seeking to evaluate
social and economic change, where the government spends
a good portion of the budget, and where the largest por
tion of capital formation is located (mainly in the urban
centers), then the Mexico City price index is a reason
able Indicator.
Increase in actual over projected expenditures.
The wide disparity between the projected and actual budget
is quite evident as shown in Table 17 . It is difficult
to determine whether projected budgets were the expendl-
/
tures the various presidents had in mind. Avila Camacho,
Miguel Aleman, and Hulz Cortlnes grossly underestimated
their economic budget for development and infrastructure,
while the social and administrative expenditures were over
estimated. There is also no way of determining all the
possible reasons for the disparity between the projected
budget and actual expenditures, since, as noted earlier,
there has always been a veil of secrecy about the budget
process.
It seems quite evident that the budget has had
too strong a political orientation. The reader is by now
aware of the power of the President who, with his minister
366
or head of whichever department is Immediately involved,
decides major Issues with very little coordination with
other Interested federal agencies. This procedure makes
it difficult to achieve unity of action among all poten
tial policy-makers, to say nothing of reaching agreement
on what over-all policy should be. We may grant that
in recent past "personalism1 1 in budget matters was polit
ically expedient. But at today’s stage of development
Mexico can afford to institutionalize advanced technical
systems and procedures, for there is no dearth of capable
Mexican economists and technicians. To paraphrase Miguel
Wlonczek, The President should have at his disposal a
group of professional policy advisers divorced from the
context of the daily political struggle and be willing to
support them against pressures exerted from various
36
sources.
V. MONETARY AND FISCAL POLICIES
In another section of this chapter reference was
made to Mexico's recent threat of stagnation. This was
an important milestone for Mexico because an Inventory
36
Miguel S. Wlonczek, "Incomplete Formal Plan
ning: Mexico," in Everett E. Hagen, (ed.), Planning Eco-
nomic Development (Homewood. Illinois: Richard D. Irwin.
1-^3), p. 179.---
367
was taken, as it were, of the underlying and immediate
causes for this condition. There are several points to
consider, first with regard to developments in the pri
vate sector.
Demand for resources during World War II gave
rise to exports and internal economic development. For
one thing, Mexico had begun to acquire European capital
s
and entrepreneurs by 1939* And by 19^0 Avila Camacho
had begun a definite drive towards industrialization, as
discussed earlier. Postwar conditions made possible con
tinuous Internal development. Postwar shortages, import
protection, and extention of credit facilities promoted
production of consumer durable goods by the rising new
Industries, as well by the additional development of basic
resources. The Aleman administration embarked on an even
more intense industrial development program than his pre
decessor. The pace slackened somewhat at the beginning of
the Ruiz Cortlnes regime, but the substitution of domestic
production for Imports continued steadily, in addition to
the accelerated Inflow of tourist earnings and foreign
Investments— all of which tended to generate a fairly sat
isfactory economic performance for Mexico.
The money supply (i.e., coins, currency, and de
posit liabilities of the monetary system) Increased rough-
368
ly In the same proportion as the GNP over the same per
iod. Moreover, devaluation of the peso was characteris
tic of that era— from 4.85 pesos in 1942 to 12.50 pesos
to the dollar by 1954— thus making the peso attractive to
the foreign sector, but also adding to the problems of
inflation, and thereby inviting the periodic application
of selective controls by the central bank. But there were
other reasons for the latter. The application of selec
tive controls was necessary because of the increasing rate
of investment relative to consumption. Thus, selective
control policies tended to promote periodic tightness in
the domestic money and capital markets. This measure
brought about excess capacity in certain industries that
had previously expanded output rapidly under the stimulus
of rising domestic demand and favorable prices in inter-
37
national markets.
By the time Lopez Mateos became president, the
impetus to growth— typical of the previous twenty years—
began to show definite signs of slowing down. Further
more, the recession in the United States was beginning to
have an adverse effect on Mexico's staple exports of cot
ton, coffee, and non-ferrous metals. Some of the business
37
Brothers and Solis, 0£. clt., pp. 52-53-
369
community felt that the Banco de Mexico's monetary poli
cies were too repressive on economic development. And,
adding to the pessimistic climate, many businessmen be
lieved that their manufactured products could not find
extensive export markets because, traditionally, they were
accustomed to thinking of themselves as high cost produc
ers. The gloom did not end there. They had also acquired
a firm conviction, despite some evidence to the contrary,
that advanced countries would never permit the large scale
importation of manufactured products from less-developed
countries
Since easy opportunities for domestic Investment
in import-substituting manufacturing seemed to be drying
up, the private sector was convinced, at that time, that
future substitution would have to take place in the inter
mediate goods usually involving larger investments— a pro
gram that seemed difficult to undertake at the time in
view, for one thing, of the tightness of money market and
the ever watchful eye of the central bank. This situa
tion, however, was improved considerably by the easier
monetary policies of Lopez Mateos through the Banco de
Mexico and Nacional Financiera, so that by 19&3 Mexico had
O Q
Vernon, op. cit.. pp. 116-11?.
370
embarked on a heavy Investment program for the manufactur
ing of heavy capital goods, assembly systems, et cetra.
The public sector, too, began to buy a number of private
enterprises In which foreigners had heavy Interests.
These Included the two remaining large foreign owned
electric power companies, two chains of movie theaters,
and a major Mexican steel company.
At the same time, the Lopez Mateos' government was
borrowing heavily from abroad through the Nacional Finan-
ciera. His fiscal budgets took major jumps in the early
I960's, thus Incurring deficits; but the economy respond
ed favorably by evidence in the growth of the GNP. In
flation In the early 1960's continued steadily, but at a
much lower rate than in the previous administrations.
Thus, Mexico reached a new level of economic development.
But it still faces serious problems of imbalance in the
vast rural sector, where purchasing power is very low and
where income distribution still shows a wide gap between
the rural and urban workers.
It has been mentioned that Mexico employs mone
tary policy as a technique for maintaining economic sta
bility. This stems from the fact that the fiscal system
Is less effective because of the lack of responsiveness
of tax revenue to increases in the GNP. The tax revenues
371
of the federal government has been about 12 per cent of
the GNP in recent years as compared to 20 to 30 per cent
for advanced industrial nations. Consequently, until Mex
ico initiates further reforms in the fiscal system (some
of these began in 1966) she must continue to rely, in part,
even in the immediate future, upon monetary measures in
pursuing economic policy objectives. Thus, the present
system dictates greater reliance on qualitative controls
than is common in countries with more fully developed
financial markets and fiscal systems. This is not to say
that quantitative controls are entirely ineffective; but
they are nonetheless definitely limited as a monetary
policy for economic policy objectives. For example, Mex
ico cannot rely entirely on open market operations and
variations in discount rate because the market for govern
ments and other securities are not well developed and be
cause the overall credit market is not sufficiently inte
grated to permit pressures placed in one part to be trans-
39
mitted to all other parts.
Moreover, borrowing decisions by the business
community are not necessarily affected by changes in the
cost of borrowed funds. Demand for credit is influenced
39
Brothers and Solis, clt.. pp. 52-53.
more by shifts in consumer preferences and expectations
regarding future profits. Consequently, marginal adjust
ments in Interest rates introduced by means of open market
operations, or for that matter rediscounting procedures,
would not be very effective in controlling the aggregate
volume of expenditures. Credit restraints would require
a change in the interest rates of too great a magnitude.
Also, Mexico has been plagued by shortages of domestic
savings necessary for an adequate rate of capital forma
tion and output growth. Since the 19^0!s, the economy
has relied heavily on direct and indirect foreign financ
ing. This has relieved heavy pressures on the Mexican
capital markets, but the interest rates have been sur
prisingly high. Commercial bank loans at short term in
mid-1962 cost from 10 to 12 per cent. Intermediate-term
loans in private flnancieras cost established borrowers
about 14 to 18 per cent, and small businesses often pay
40
20 to 30 per cent. On the other hand, money borrowed
abroad through official institutions (for example, NAFIN)
and re-lent within Mexico commands a much lower Interest
rate.
In view of these reasons, exclusive reliance on
40
Vernon, (Ed.), o£. clt. , pp. 122-123*
interest rate adjustments is likely to inhibit investment
expenditures more than expenditures for consumption goods,
thus placing a further restraint on economic development.
It follows, therefore, that Mexican monetary policy has
been directed primarily towards limitations of credit
availability rather than alterations of the cost of bor
rowing funds, should this measure be necessary for the
maintenance of economic stability. On the other hand,
as in the case of Lopez Mateos, monetary policy was used
as a measure for promoting easier credit at a time when
the economy was in need of Incentives for investments in
further economic*development. In a macro economic sense,
fiscal policy has been, of course, less effective. Yet
the Mexican government still Indulges in its traditional
"particularism," by extending tax concessions and incen
tives on particular Investments the government is interest
ed in promoting.
In late 1965 "the Diaz Ordaz administration intro
duced tax reforms designed to promote greater progresslv-
lty in federal revenues. It remains to be seen if this
measure limits luxury consumption and increase the ability
of the federal government to finance expanding Investment
expenditures from current revenues, reduce chronic budget
deficits, and thereby limit the mounting internal indebted
37k
ness. The federal government may rely more on internal
resources for the financing of infrastructure and the
growing needs of social and economic expenditures, and
thus attain an even more effective economic role In di
recting and influencing more balanced economic growth in
Mexico.
VI. SUMMARY AND CONCLUSIONS
The beginning of this chapter dealt with the
characteristics of government taxation in recent adminis
trations, and also with the fact that the big push in in
dustrial development, and government’s increase in eco
nomic expenditures, revealed the existing tax system as
Inadequate in supplying the needed revenue. Therefore,
tax reforms were essential--particularly in the income
tax system.
The budget classification clearly indicates the
social and economic policies initiated by central govern
ment according to types of emphasis, thus revealing the
nature of social change in the last three decades. How
ever, in spite of the improvement in new budgetary tech
niques, budget administration has not attained a high de
gree of success, due to the old familiar pattern of in
formality and "personalism" in the presidency. This is
375
not to deny, however, that the Institutionalization of
the budget-making process Is slowly becoming a reality.
The two decades of rapid industrial growth (19^0-
1960) has brought about symptoms of economic stagnation
as import-export substituting manufacturing seemed to be
drying up. Moreover, the recession in the United States
during the late 1950’s brought adverse effects on Mex
ico's staple export industries, thereby not only depres
sing the commodity markets, but also reducing needed for
eign exchange for scarce foods and goods essential for
the nation's Infrastructure.
Inflation also persisted throughout the period in
question. This was partly due to the shift of resources
from consumer production to capital formation, and also
to the size of the stock of money in circulation. In part
as resulting from the large volume of public credit for
Infrastructure and private capital growth. Furthermore,
as noted previously, fiscal policy was less effective as
an Instrument for maintaining economic stability because
of the lack of responsiveness of tax revenues to Increases
in the nation's Gross National Product. There was an ob
vious need for fiscal reforms, some of which were initi
ated by the present administration in 1966.
Thus, the symptoms of economic stagnation during
376
the late 1950‘s found Mexico in a dilemma of economic cir
cumstances: inflation and the slowing down of domestic
investment opportunities in the private sector. But as a
measure against inflation, the central bank had relied on
selective controls as means for restraining the growth of
capital goods investments over consumer goods; such a
measure, however, tended to promote periodic tightness in
the domestic money markets. And, with the loss of some
of Mexico’s staple and non-ferous metal exports during the
late 1950's, some of the business community felt that the
central banks monetary policies were too repressive on
economic development.
In order to circumvent the above dilemma, Presi
dent Lopez Mateos took bold steps. He used the budget
system, the central bank monetary policies, and the de
velopment bank (NAFIN) public credit as a means for pro
moting further growth. The budget took a major jump in
the early 1960’s thus incurring deficits. Furthermore,
the Increase in economic and social expenditures were an
answer to political unrest and the criticisms of unbal
anced growth. Through the National Financiers the Presi
dent embarked on a promotion of heavy Investment programs
for the manufacturing of heavy capital goods, assembly
systems, et cetra. The central bank eased up on its se-
377
lectlve controls, thus bringing an easier money policy
which was more beneficial to the capital goods producers
than consumer goods manufacturers.
The President's over-all spending policies did
stimulate consumer demand, especially in the urban and
manufacturing centers, although his recent aim has been
to increase the purchasing power of the rural community
which has suffered loss of real income and has been a
persistent problem to the macro economic growth of Mex
ico. However, while inflation in the early 1960's con
tinued steadily, its rate of growth has been much lower
than in previous administrations. Thus, Mexico may be
reaching a new level of real economic development, the
goals to which central government has been committed, and
which are in keeping with the recent reinterpretation of
the ideals of the Revolution.
CHAPTER IX
SUMMARY AND CONCLUSIONS
The theme of this dissertation has been the evo
lution of the role of the Mexican government as a politi
cal and economic Instrument in the economic growth of the
nation. Several significant dimensions were essential in
the promotion of such a process, all of which were pre
sented in the various sections of this study. This chap
ter, therefore, summarizes the essence of each of the
chapters, and concludes with a discussion of various di
mensions significant to the study.
I. SUMMARY
Chapter I presented the problem, objectives, and
the scope of the study. In essence, the chapter briefly
discussed the problem that all societies emerging from
under-development must face. The problem is in changing
from traditional social attitudes to those Western mores
contrlbutive to modern economic development. The chapter
included other considerations, such as the problem of de
termining the overall social and economic approach to de-
378
velopment. This included such factors as: (1) the ex
tent of central government direction in resource alloca
tion for social overhead capital and private capital for
mation; and (2) how strong the role of the public sector
should be in planning resource allocation in a mixed econ
omy. Therefore, to understand the unique role of the gov
ernment of Mexico today, it is essential to be aware of
the broad changes in Mexico’s social and political spec
trum with relation to the past.
Chapter II presented a brief survey of the major
theories of economic development. The classical theory of
growth was discussed as a series of mutually consistent
and interacting propositions that make up the whole clas
sical model. Marx's theory of economic development was
the core of his system, and it was indicated that he bor
rowed some of his propositions from the classical school,
but significant departures were also noted. It was con
cluded that Marx's theory of economic development had lit
tle merit as a model to meet the problems of underdevelop
ed countries. The Schumpeterian theory of economic de
velopment rests on the broad principles of innovations,
the investment climate conducive to innovations, and en
trepreneurship. While Schumpeter's theory is oriented to
advanced economies, the model does have some application
379
to underdeveloped economies, especially at the "take-off"
stage. In other words, adaptive enterpreneurshlp is of
value to an underdeveloped economy, as with the case of
Mexico whose rapid rate of growth stems in part from the
adoption of foreign technology and new marketing methods.
The Harrod model of growth Is concerned with the problem
of secular stagnation experienced by mature economies, and
why capitalist development tends to be irregular. Thus,
development faces the problem of maintaining steady growth
without excessive Inflation. The model, however, has lit
tle value to the problems of underdevelopment because It
assumes an economy where the public sector is entirely
absent. The latter part of the chapter discussed the so
cial aspects of underdeveloped economies.
Chapter III was concerned with the geography, dem
ography, and economic resource base of Mexico. As a back
ground to the study of economic development, the chapter
discussed the nation's physical assets and liabilities.
The various regions of Mexico present a variety of social
and physical conditions to the development process. The
section on demography discussed the size and composition
of Mexico's population. Recent data indicates that the
nation has experienced a steady growth In population dur
ing the present century, but that during the last thirty
380
years, a period of fast economic development, the country's
population has grown at an astonishing rate. This situa
tion presents a serious problem in the form of pressure
on future resource development, if demographers are cor
rect in their forecast of the 1980 estimates.
The economic resource base of Mexico Is an Impor
tant factor In the development process. For Instance, the
variety of climates and soil makes possible a wide output
of agricultural products. Yet, Mexico is not self-suf
ficient in all her agricultural needs. In the mineral
field, Mexico has been a leading world supplier of sil
ver, mercury, lead, zinc, and sulphur. On the other hand,
there are important minerals essential to economic growth
that are scarce. This is true of iron ore, steel, and
aluminum. It Is not surprising, therefore, that Mexico
finds herself with sporadic Import surpluses essential to
economic development.
Chapter IV served as a historical background, and
presented the early embryonic stages of development of the
role of government. The first part of the chapter dis
cussed the institutions of the colonial period: the col
onial administration, the hacienda system, and the role
of the church In the social and economic life of the Span
ish colonies. The three hundred and fifty years of colon
381
ial rule, based on the concept of special privileges, de
prived the post-colonial public officials of capable pub
lic administration for two reasons. First, only the Span
ish born could hold administrative offices in the colonial
government. Consequently, the criollos, and of course the
mestizos, were deprived of practiced training in public
administrations. The second reason was related to status,
personal worth, and "the noble state." Many of the capa
ble criollos would have no truck with politics. The lure
of "class" discouraged many capable entrepreneurs from
applying their skills, and encouraged them to become land
ed gentry and "noble haciendados" instead.
In the hacienda system, the vast population of
Indians supported the whole colonial economic structure
with their endless toil, which was applied not only to the
mines, but to the service industry as well. Their econom
ic plight did not improve during the nineteenth century;
but the Indian population became a powerful force behind
the Revolution of 1910 and the subsequent agrarian reforms
in the post-revolutionary period as noted in Chapter V.
The Roman Catholic church was the State religion
in Mexico until the adoption of the Constitution of 1857.
It is not possible to overlook its past social and economic
power over Mexico. At the time of independence (1821), the
382
property of the church consisted of one-half of the total
value of all productive real estate in Mexico. The eco
nomic position of the church was maintained and strength
ened through the special privileges it enjoyed, such as
tax exemptions and privileges of lending money on mort
gages, in addition to the tithes paid by the lay popula
tion for church support. Economically, a part of the
colonial earnings was continually siphoned from the in
come stream into non-productive purposes.
In a political sense, Mexican independence meant
a change from colonial rule to national autonomy; but the
leadership was maintained by the same ruling classes. The
spirit of independence did not include any changes from
the social and economic order of the Spanish regime. On
the other hand, the embryonic emergence of Mexlcanlsm
laced with liberal goals began with Miguel Hidalgo and
Jose Morelos. Both were Catholic priests who sounded the
battle cry for social and economic reform, but whose ini
tial efforts were not realized until the Revolution of
1910.
Chapter V was a significant section in this study
of the evolution of the role of modern government. The
chapter discussed three important dimensions: the politi
cal reforms of 1857; the Juarez administration and his
383
social reforms; and the Diaz dictatorship. The Mexican
reforms of the 1850's affected the destruction of the
earlier colonial feudalism and political and economic
privileges. It was an effort to abolish the independent
powers of the clergy, the military, and the landowners.
The role of government, as designed by the Constitution
of 1857, was not one that outlined the economic respons
ibility of government as an instrument to economic growth.
Instead, the constitution was designed to make Mexico a
liberal democratic republic; a role that the nation was
not prepared to undertake at that time.
Benito Juarez looms as the symbol of modern Mex-
icanism. His role as a leader was a difficult one, for
he was responsible to a very large measure for breaking
the power of the traditional privilege class, ending mon
archy and direct foreign domination in Mexico, and estab
lishing the early political and economic blueprint for
the spirit of the revolution which later brought about
considerable economic change.
It is generally agreed that the Forfirlo Diaz
administration gave Mexico the first Impetus of capital
development in the modern sense, as well as the political
stability necessary for economic growth. To this end,
Diaz promoted the importation of foreign capital as the
384
principal source for development. Millions of acres of
public and Indian lands were turned over to foreigners
for agriculture and mining. Oil, precious metals, and
industrial minerals were exploited by North Americans and
British entrepreneurs. Moreover, one of the greatest con
tributions to infrastructure by Diaz was the railroad—
from 400 miles during the Juarez regime (1868-1872) to
15,000 miles by end of the Diaz dictatorship. It is not
able, too, that Diaz put the nation’s international cre
dit In good order, a factor instrumental in promoting ad
ditional foreign capital for development.
Many liberals contend, however, that the Diaz
brand of economic growth came at a high price to the vast
landless Indian population and, moreover, promoted the
classic dualism peculiar of underdeveloped economies.
The pricing advantage of Mexican raw products in foreign
markets stemed principally from the very low wages paid
the Indians— a condition Instrumental in bringing about
the Revolution of 1910•
Chapter VI covered the period from 1910 to 1940,
a period which crystalized the long-run goals of Mexico,
and one where the modern role of government in the de
velopment process was definitely established.
Several forces brought about the Revolution of
1910. An important one was the rise of the peasantry as
385
a result of age-old exploitation. The principal early
leaders in this quest were Pancho Villa and, most point
edly, Emiliano Zapata. But these leaders created more
chaos than reform because they lacked organization and
constructive goals. The intellectuals also sought social
change, but their movement was mainly political and bur
dened by a variety of Ideologies. Nonetheless, the force
behind the revolution included demands for both political
and agrarian reforms. These goals were difficult to
carry out simultaneously at that time, as was seen in the
case of Francisco Madero. Thus, the period from 1910 to
191^ was one where a nation sought political unity and
stability for the establishment of a government capable
of initiating reform.
Carranza was the first revolutionary leader to
affect political unity. The Decree of 1915 was the first
in a series of land reform measures designed to meet the
most pressing economic issues of the early revolution.
The expropriation of agricultural and oil lands were also
initiated by Carranza. Under his leadership the Consti
tution of 1917 was drafted. It was an important document
which specifically spelled out the role of government In
the development process.
Plutarco Calles was noted for his contribution to
386
further political reform but, more significantly, for the
early development of an infrastructure and monetary re
form, In the latter area, he established the central
bank (the Banco de Mexico), which took control of commer
cial credit and the stock of money in circulation.
The latter part of the chapter discussed Lazaro
Cardenas, who is believed to be the outstanding leader of
modern Mexico, and his contribution to political progress
and the development of the nation. During his administra
tion, agrarian reform was more extensive than that of any
other president. Oil, industrial minerals, and agricul
tural lands were expropriated, Cardenas also firmly es
tablished the oil, electric power, and communications
industries as leading public enterprises and as part of
the nations Infrastructure. He sought foreign capital
that was willing to build Mexico and growth In the process
as well.
The government's fiscal policy undertook exten
sive social and economic expenditures, a greater portion
of which was allocated to agrarian reform. It is not sur
prising, therefore, that budgetary deficits were recorded
each year from 1936 on. And such fiscal policies, accom
panied by monetary expansion, caused rising price levels
which eventually became both the cause and the effect of
deficit spending.
387
In an overall view, President Cardenas attained
not only the political stability which Is extremely Impor
tant to economic growth, but also a system of public cre
dit for government-owned enterprises and the private sec
tor as well. The most notable of these was the Nacional
Flnanciera; it Is the nation's leading development bank
today.
Chapter VII discussed the post World War II era—
a period when the nation took a sharp departure from em
phasis on agrarian reform to full-scale Industrialization.
There were sharp divisions of opinions as to whether the
role of government should be to encourage industrializa
tion, or whether to continue to place emphasis upon the
original "Ideals" of the revolution. Ultimately, the
tecnicos were very Instrumental in promoting industrial
growth.
The Avila Camacho administration (19^0-19^6), and
subsequently that of Miguel Aleman (19^7-1952), made vig
orous efforts to promote Industrial development through
various measures. Economic expenditures were increased
considerably for the development of a greater infrastruc
ture. While land reform paled, the government expanded
the capital formation in public enterprises, and in the
petroleum, chemical, electric power, and communications
388
Industries. Large outlays of capital funds were allo
cated for food and Industrial crops, irrigation projects,
and the building of public dams. Expenditures on high
ways were trebled, not only as part of the economic de
velopment program, but also to facilitate tourist travel-
-which yields a much needed dollar exchange for Mexico.
The chapter also discussed the political frame
work for government decisions, which is an Important di
mension of the budget-making process, public expenditures,
and the effectiveness of public resource allocation. The
president Is the key to the whole process of decision
making. Since the president is the strongest leader in
the PRI, congress is usually acquiescent to the presi
dent's proposals and wishes.
Chapter VIII treated the problem of the budget-
making process and analysis, sources of revenue, the prob
lem of Inflation, and the threat of stagnation during the
latter part of the 1950's. The Increase in government
expenditures revealed the existing tax system as inade
quate in supplying needed revenues; therefore, efforts
were made during the mid-1950's to reform the Income tax
system. This was necessary because the tax rate was not
in keeping with the rate of growth of the national pro
duct .
389
The new budget classification after World War II
clearly indicated the government's social and economic
policy. However, in spite of the effectiveness of the new
budgetary techniques at hand, budget administration had
not attained the desired degree of success, because, as
mentioned in Chapter VII, of the familiar pattern of in
formality in the office of the presidency.
The threat of stagnation during the late 1950*3
was met courageously by President Lopez Mateos. His fis
cal budget Included large economic expenditures, especial
ly for the hinterlands, where unbalanced growth was most
evident. The central bank, and the Nacional Financiera,
expanded credit facilities to public enterprises and to
the private sector as well. Inflation continued during
this period, however, but at a lower rate than the pre
vious administrations. Thus, the president's overall
spending policies stimulated consumer demand. It was
noted, however, that Increase in consumer demand was more
pronounced in the urban centers. However, the government
has embarked on a program dedicated to promote a higher
purchasing power for the rural population--the group that
has carried the heavier burden of the development process
to date.
390
II. CONCLUSIONS
There are several Important dimensions of the
evolution of government In Mexico and the role of the
Active State. References to the various periods of
social and economic conditions are essential to an un
derstanding of this evolutionary process. The latter
part of the nineteenth century, for example, was a period
in which social upheavals were essentially of a politi
cal nature, lacking In the formulation of broad economic
plans— other than the nebulous goals of "social justice."
Nonetheless, the question of political reform and sta
bility was an important process to be settled for effec
tive government decisions and continuity of effort.
The fall of the Diaz dictatorship brought about
a revolution, laced with a variety of Ideologies; and,
while the nation achieved a complete political break
with the past, the revolutionary leaders set off simul
taneously what may be called two separate revolutions.
One demanded political change, while the other was an
economic revolution insisting on agrarian reform. Both
sets of goals reflected the aspirations of the times,
but it was not possible to carry out both of them at the
same time. Political leadership and consensus had to be
settled first.
391
But social goals are essential to a nation. This
is true because economic development of underdeveloped
economies is primarily a study of political economy, and
a nation's Ideology, social forces, and attitudes toward
development are Important factors in economic growth.
In the Mexican case, the Revolution of 1910 did estab
lish the revolutionary ideology essential to unify a
nation towards a common goal, which eventually crystal-
ized in agrarian reform. Moreover, the Constitution of
1917 set the format for economic development and the
specific role the government was to undertake in the
political economy. Thus, while the Constitution estab
lished the principle of Active State, it did not become
a fact until the Cardenas regime and subsequent admin
istrations .
The Mexican government, therefore, emerged by
the 19*K)'s as an Active State— nationalistic in charac
ter. It employed the market mechanism as the major pro
cess for resource allocation, but exerted strong In
fluence on it by the new economic rules of the game, such
as the protection of young Industries, tax exemptions,
and the active promotion of export industries. The bud
get system and the autonomous public enterprises became
powerful Instruments for allocating public resources, and
392
as a positive influence on investment in the private
sector. Moreover, the Active State took strong measures
in promoting economic growth by establishing the public
development bank— a successful and powerful Institution
which lends heavily to both the public and private sec
tors .
On the question of social change, the role of
modern government emerged from a series of political up
heavals of the past. And, as already noted, it was es
tablished through the Revolution of 1910. This doesn*t
demonstrate that revolution is a necessary ingredient to
social change and economic development. In the case of
Mexico, however, the nation made a complete political
break with the past, and this break was strategic to its
economic development.
The budget analysis is another Instrument for
guiding economic change in a nation. In Mexico, budget
administration is at present the major means of guiding
social and economic change. Unfortunately, budget makers
have not formulated organized plans of budget expenditures,
nor do they make public its content, since, as mentioned
in Chapter VIII, the budget is projected rather than ac
tual. Moreover, in recent administrations, the presi
dent has had great power to use federal funds as he sees
fit In order to carry out his program. Therefore,
presidents have reflected the ideology of their time
by the manner In which they allocated public funds for
social and economic expenditures in order to promote
what they consider revolutionary goals.
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39^
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Creator De Flores, Louis Joseph (author)

Core Title The Evolution Of The Role Of Government In The Economic Development Of Mexico

Degree Doctor of Philosophy

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag Economics, Finance,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Phillips, E. Bryant (committee chair), Backer, Edward H. (committee member), Elliott, John E. (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c18-615890

Unique identifier UC11360778

Identifier 6812029.pdf (filename),usctheses-c18-615890 (legacy record id)

Legacy Identifier 6812029.pdf

Dmrecord 615890

Document Type Dissertation

Rights De Flores, Louis Joseph

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

Repository Name University of Southern California Digital Library

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