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The political economy of procyclical fiscal policy in Mexico, 1970--1988

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The political economy of procyclical fiscal policy in Mexico, 1970--1988

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Content THE POLITICAL ECONOMY OF PROCYCLICAL FISCAL POLICY
IN MEXICO 1970-1988
Copyright 2004
by
Manuel Sanchez de Cima
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
(POLITICAL ECONOMY AND PUBLIC POLICY)
August 2004
Manuel Sanchez de Cima
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UMI Number: 3140550
Copyright 2004 by
Sanchez de Cima, Manuel
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ii
Dedication
In memory of my grandfather, who taught me the value of hard and honest work.
To my mother, that has always believed in me and that has been there for me
unconditionally.
To Tutis, that is the best sister that one could ever dream to have.
To Anna, who has loved and supported me always.
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iii
Acknowledgements
This dissertation would not have been possible without the support of many
persons and institutions that I wish to acknowledge here. First of all, to the University
of Southern California, for supporting my studies and making this an incredible
experience. The Center for International Studies at the University of Southern
California awarded me a doctoral dissertation fellowship that made possible this
dissertation. The College of Letters, Arts, and Sciences awarded me a doctoral
dissertation fellowship that helped me finish this dissertation. I am in debt with the
Department of Spanish and Portuguese, which hosted in its offices most of the writing
of this dissertation and especially to Gayle Vierma for her support and excellent
example.
For their time, patience, guidance and valuable observations I thank Carol
Wise, Nora Hamilton, and Carlos Vegh the chairs of my dissertation. I thank the office
of Internal Credit at SHCP for hosting me during my summers of research in Mexico
City. To Mayte Martinez for helping me get the data sets, and to Jaime Rodoreda and
Oscar de la Sierra, for their hospitality in Mexico City.
To the people that shared their ideas and comments with me: Rolando Cordera,
Andres de Oteyza, Pedro Noyola, Nora Lustig, Carlos Gonzalez, Peter Rosendorff,
Timur Kuran, and Jeffrey Nugent. Special thanks to Richard Day who brought me to
USC. To my colleagues Joserra Perea, Ximena del Carpio and Ali Shanawaz for their
comments, encouragement and help in difficult times of the investigation.
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A very special thank you note to my mother who has always believed in me
and has been patient with my development as a scholar, to my sister for all her support
and advice, and to Anna for her understanding and love. To my friends and family for
being there for me always, Manolo, Dario, Miguelon, Javi, Ferdi, Santiago, Ana, Jose,
Daniel, Genaro, Martin, Chuchis, Yuca, Chun, Charo, Jose Antonio, Gena, Lupe, tio
Fer, and the Fernandez family.
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Table of Contents
Dedication
ii
Acknowledgements
iii
List of Tables
V
List of Figures
viii
Abstract
ix
I. Introduction
1
II. Pressure Groups
25
III. Empirical Evidence of Procyclical Fiscal Policy
84
IV. The Lack of Political Business Cycles in Mexico
105
V. Stabilizing Development
130
VI. Populist Policy Increasing Instability Under Echeverria
150
VII. Managing the New Wealth and Confront of Crises: Lopez Portillo
201
VIII. The Lost Decade: de la Madrid (1982-1988)
264
IX. Conclusion 327
Bibliography
337
Appendix 1 352
Appendix 2 356
Appendix 3 357
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List of Tables
Table 1.1 Macroeconomic Indicators by Sexenio
Table 1.2 Fiscal Policy Tendencies by Sexenio
Table II. 1 Mexican Bankers Association (ABM) 1970-1982
Table II.2 Mexican Council of Businessmen (CMHN) 1962-1983
Table II.3 Indicators for Public Sector Finances 1970-1988
Table III. 1 Government Deficit and GDP Growth, 1970-1988
Table III.2 Cyclicality Coefficients
Table III. 3 Cyclicality Coefficients Lagged One Period
Table III.4 Cyclicality of (3-Coefficients for OECD countries,
Ireland, Portugal and Mexico
Table III.5 Cyclicality of Public Sector and Federal Government
Revenues
Table IV. 1 Electoral Support and Legislative
Representation in Mexico 1979-2000
Table IV.2 Dependent Variable GT
Table IV. 3 Dependent Variables GCU and FDY
Table V. 1 Growth and Stability in Latin America
1950-1970 (Average Growth)
Table V.2 Agriculture Performance 1960-1970
Table V.3 Mexico Public Spending and Public Debt 1960-1970
Table V.4 Macroeconomic and Fiscal Policy Indicators 1965-1970
Table VI. 1 Main Figures of the Echeverria Administration
22-23
24
36
40
81
85
94
96
98
102
109
124-125
126
138
139
142
149
154
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Table VI. 1 Main Figures of the Echeverria Administration
Table VI.2 Behavior of Public Expenditures 1970-1976
Table VI.3 Composition of Public Expenditures by Sector 1970-1976
Table VI.4 Real Fiscal Deficit 1970-1976
Table VI.5 Federal Government Revenues 1970-1978
Table VI.6 Mexico: Sources of Growth 1970-1980
Table VI.7 Revenues, Expenditures, and Real Fiscal Deficit 1970-1976
Table VI.8 Indicators for Public Finance
(Consolidated Public Sector) 1970-1976
Table VI.9 Public Sector Finances 1973-1982
Table VI.IO Financing the Foreign Sector Deficit 1971-1976
Table VI. 11 Summary of Economic Indicators and
Government Expenditures, 1970-1976
Table VII. 1 Main Figures of the Lopez Portillo Administration
Table VII.2 Comparison of Planned and
Actual Oil Production and Exports
Table VII.3 Oil and the Mexican Economy 1976-1982
Table VII.4 Comparison of PEMEX’s
Domestic and Export Earnings, 1977-1982
Table VII.5 PEMEX Export Earnings and
Share of Total Exports, 1974-1982
Table VII.6 Mexico: Balance of Payments 1977-1982
Table VII.7 Some Relevant Figures for
the Good Years of the Sexenio 1976-1981
154
159
160
164
169
175
176
176
180
180
199-200
207
215
219
224
225
228
233
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v ii
Table VII.8 Capital Flight 1971-1987 238
Table VII.9 Summary of Economic Indicators and 262-263
Government Expenditures, 1977-1982
Table VIII. 1 Main Figures of the de la Madrid Administration 267
Table VIII.2 Debt Burden, Major Shocks and 268
Resource Transfers 1981-1988
Table VIII.3 Fiscal Adjustment and Real Exchange Rate 1980-1988 272
Table VIII.4 Government Spending 1983-1988 272
Table VIII.5 Debt and Debt Payments 1982-1990 274
Table VIII.6 Summary of Economic Indicators and 325-326
Government Expenditure, 1983-1988
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List of Figures
Figure III. 1 GDP vs Government Total Spending
Figure III. 2 GDP vs Financial Deficit
Figure III.3 GDP vs Government Debt Interest Payments
Figure III.4 GDP vs Public Investment
Figure IV. 1 Real Industrial Production Growth over the Electoral Cycle
Figure IV.2 Real Total Spending Growth over the Electoral Cycle
Figure IV.3 Real Investment Spending Growth over the Electoral Cycle
Figure IV.4 Net Total Transfers vs Real GDP
Figure 1.1 GDP vs Government Total Spending
Figure 1.2 GDP vs Government Current Spending
Figure 1.3 GDP vs Government Interest Payments on Debt
Figure 1.4 GDP vs Government Wage Consumption
Figure 1.5 GDP vs Government Social Spending
Figure 1.6 GDP vs Government Education Spending
Figure 1.7 GDP vs Government Financial Deficit
Figure 1.8 GDP vs Oil Prices
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ABSTRACT
The aim of this dissertation is to link the procyclicality of Mexican fiscal
policy to a political economy argument, since it is clear in this case study that the
government does not act of its own volition in this particular issue area. The
dissertation argues that pressures from interest groups influence fiscal policy in a
procyclical direction; during economic expansions pressures increase as groups fight
to gain access to government resources; during recessions interest groups ease their
pressures since there are less resources to fight over.
Taking the fiscal deficit and GDP trends together, this study finds that between
1970-1988 Mexican fiscal policies behaved procyclically in 10 of those years, in 6
years it was countercyclical and for 2 of these years the pattern was acyclical.
Countercyclical years are more common during recessions, as the government lags the
adjustment to reduce its spending when the economy faces crisis. Interest payments
on Mexico’s enormous external debt played an important role during the
countercyclical years, making it impossible for the government to reduce its deficit
despite the cutting of almost every other public spending category. The public
spending categories that showed a more procyclical pattern were driven by
government consumption (the strongest variable), followed by current spending,
government investment, government current spending, current transfers and
government social spending.
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In order to prove the influence of pressure groups I linked proxy-variables to
each pressure group as a measure of their ability to politically influence government
spending behavior. Regression analysis shows that the designated variables positively
correlate with government spending, therefore influencing fiscal policy.
I also created a model to prove the correlation between the political spending
cycle and the business cycle. The results are negative, and one possible explanation
might be that during the period under study Mexico was ruled by a single-party semi
authoritarian regime, which greatly discouraged political competition. Another
interesting finding is that shifts in power between pressure groups were reflected in the
economic ideology embraced by different administrations over time.
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I. Introduction
i. Procyclical Fiscal Policy: Debates and Significance
The behavior of fiscal policy in Mexico during the period 1970-1988 sheds
light on one of the major issues still under debate in the field of macroeconomics: the
relationship of fiscal policy to a given country’s business cycle. While economists
argue that fiscal policy should be either countercyclical or acyclical, Mexico has
consistently followed a procyclical fiscal policy. By procyclical fiscal policy, I am
referring to the tendency for government to expand during periods of growth and to
contract when recession sets in. The question remains as to why this procyclical
pattern has persisted in Mexico, given sound evidence that suboptimal fiscal policy
imposes substantial and avoidable costs. Therefore, this dissertation will probe one
main question: why has Mexico followed a procyclical fiscal policy despite a general
consensus that the preferred course would be that of a countercyclical or acyclical
fiscal policy? Along the lines of some of the most convincing and important research
related to this topic, I argue that the procyclicality of fiscal policy in Mexico is a result
of the numerous pressures exerted by special interest groups.
My explanation differs from the ones given by Aizenman et al. (1996) and by
Gavin and Perotti (1997), who argue that procyclical fiscal policy has been driven by
external factors, such as the halt in foreign lending at the very moment when a
developing country like Mexico enters into a domestic crisis. At a theoretical level, as
Talvi and Vegh argue, there is a problem with this explanation, if the government
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knows that it will lose access to international credit markets during bad times, it is not
clear that it will let the borrowing constraint bind. At an empirical level, although it
would be hard to disagree with the notion that some countries on some occasions have
faced international credit rationing, it would be difficult to argue that every developing
country has lost access to international credit markets during recessions on a
systematic basis over the last 30 years. Lane (2002) shows that the procyclicality of
fiscal policy is also present in some OECD countries for which lack of access to
international credit markets has not been typically an issue.1
The differences in these two explanations for procyclical fiscal policy could
have important explanations from a public policy perspective. While the credit
rationing would focus on the need to ensure, through different financial mechanisms,
that countries have access to liquidity in bad times, my preferred explanation suggests
that emphasis ought to be placed in reforming domestic fiscal institutions to ensure
that fiscal surpluses are saved in good times. This analysis is in line with Lane and
Tornell (1998), Tornell and Lane (1999), and Talvi and Vegh (2000) which also point
out the relevance of implementing the appropriate fiscal allocations mechanisms.
Little et al. (1993), in analyzing the behavior of 18 developing countries from 1974 to
1989, concluded that economic booms leading to large increases in government
revenues typically weaken treasury control and that most governments, either
democratic or authoritarian, are worried with the short-run and find it hard to resist
spending a windfall in revenues. They argue that when funds are readily available, and
1 Talvi and Vegh (2000).
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know by all to be available, it requires extremely strong traditions and strong-willed
financial ministers to maintain fiscal discipline.
In recent years, the procyclicality of fiscal policy has drawn wide attention
from economic researchers. With regard to developed countries, Arreaza et al. (1998)
have measured the smoothing achieved across various components of the government
deficit in the EU and OECD countries. They have generated panel-based estimates of
the degree of cyclicality in government consumption, transfers, subsidies and tax
revenues and have found that government transfers provide more smoothing of
negative than of positive shocks, (countercyclical policy is more common in these
countries). In addition, they found that there is no trade-off between a country’s high
government deficits and the ability to smooth consumption. In terms of political
economy, they find that effective budgetary institutions can accomplish efficient
consumption smoothing via government deficit spending. Overall, these findings
support the Keynesian notion of the appropriate use of countercyclical fiscal policy.
More recently, Lane (2002) has shown that the level of cyclicality in fiscal
policy varies between spending categories and across the OECD countries: countries
with more volatile output and dispersed political power are more prone to run
procyclical fiscal policies. For the sample of countries measured, he found that the
most procyclical of government spending categories is government investment.
However, for these same countries, the primary surplus also tends to be procyclical, in
line with tax smoothing predictions. One outlier is the case of Ireland. Lane (1998)
analyzes the behavior of Irish fiscal policy, and finds it to be procyclical on balance.
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He argues that even though procyclical fiscal policy is not optimal, it is the outcome of
an allocation game among competing fiscal groups. This argument is similar to the
one developed here.
In another influential study Stein et al. (1998) explore the links between
institutional arrangements and fiscal performance in Latin America. They consider
four measures of fiscal performance: the level of government expenditures, the size of
the fiscal deficit, the amount of debt, and the response of fiscal policy to business
fluctuations. They also consider two institutional dimensions: electoral systems and
the budgetary process. They observe that government spending programs are typically
financed from a common pool of resources, but benefits are not equally spread among
interest groups in the economy. As a result of this asymmetry, those who benefit from
a government program will fail to internalize the full cost of the program, since an
important portion of the cost is borne by others. This situation introduces spending and
deficit biases into the budgetary process, thus compromising the goals of fiscal
discipline.
This brings us to the famous argument by Tornell and Velasco (1992), where
they present a very good explanation of ‘the tragedy of the commons’. They explain
that the tragedy of the commons occurs when property rights over a productive asset
are ill defined or cannot be enforced, leading to over-consumption and
underinvestment. This is exactly what happens in countries like Mexico, where
interest groups see the government’s budget as a ‘common pool’ of resources that it is
up for grabs, and if they do not appropriate as much resources as possible, other
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interest groups will take them and therefore they will end up being losers compared to
other groups. Thus, the power to extract transfers gives each group ‘common access’,
via the government budget constraint, to other groups’ capital stocks.2
Talvi and Vegh (2000), find that fluctuations in the tax base of developing
countries are much larger than in the G-7 countries. They argue that the ability to run
large budget surpluses in good times is severely hampered by political pressures
which, although always present, are exacerbated in times of plenty. As a result, fiscal
resources may be wasted rather than used to retire debt, as full tax smoothing would
require.
In their model of standard optimal fiscal policy, Talvi and Vegh incorporate a
political distortion which makes it costly to run budget surpluses due to the pressures
interest groups create to increase public spending. Given this political distortion, a
government that faces large (and perfectly anticipated) fluctuations in the tax base will
choose to lower taxes in good times to fend off spending pressures. However, since
reducing taxes in good times imposes inter-temporal distortions, it will not be optimal
for the government to resist all increases in public spending. Hence, an optimal policy
response from the government to positive shocks in the tax base will involve both
decreasing tax rates and increasing spending. The opposite is true when the economy
is hit by negative shocks to the tax base. In other words, their model predicts that,
2 Tornell and Velasco (1992).
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given this political distortion, the optimal strategy for the government is to run a
procyclical fiscal policy, therefore contradicting what economic theories suggest.
In this dissertation I analyze Mexican fiscal policy, a case where the country
has followed a procyclical fiscal policy in 10 out of 18 years of the period under study
(6 have been countercyclical and 2 acyclical). In general, the countercyclical years
come during recessions, as the government delayed to reduce its spending during
periods of economic crises. It is important to note that interest payments on the
external debt played an important role in this countercyclical behavior, for example,
during the last two years of the Lopez Portillo administration (1976-1982) and during
the de la Madrid administration (1982-1988). The degrees of procyclicality of the
various components of government spending varied considerably. The most
procyclical variables were public sector consumption, current spending, and
government investment. In Mexico, interest groups have consistently exerted pressure
on the government, capital flight being the most feared threat. Therefore, the owners
of capital are the group that exerts the most pressure over fiscal policies. On some
occasions the government has acted more independently and defied these powerful
interest groups, but in general it has sought to appease the fiscal demands of the
private sector.
In this dissertation I analyze three “sexenios” or six-year presidential terms,
which allows for a comparison between each period of the differences in government
3 In their model, Talvi and Vegh (2000), try to explain the way that governments in developing
countries behave in a procyclical way. As it is explained, if G D P |— >T,|,— > exp'['— ► gov. surplus < 0 and if
GDPJ,— * ► T f— »expf— i ► gov. deficit < 0.
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spending and the role that pressure groups have played. I focus on how policymakers
responded to pressures by interest groups, and how they used fiscal policy as leverage
to deal with these pressures in different issue areas. I chose to study the three sexenios
from 1970-1988 because this marked the end of “Stabilizing Development”, an era of
high growth and stability for the Mexican economy that rendered Mexico the envy of
its South American neighbors over the post-World War II period. Stabilizing
Development was not perfect as it marginalized some sectors of the population.
Notwithstanding the 1970’s clearly mark the end of sound fiscal policies in Mexico.
The country transitions from a very controlling state to a more negotiating state. This
happened because the population pressured the government and ruling party to include
them in the decision making process. It is the end of continuity in economic policy
making. The state loses direction of where it wants to take the country and society, and
there is some political opening. 1988 marks the year when the economy officially
entered an outward looking development process, where the government adopted a
neo-liberal development model. It is true that this period has some very special
characteristics, like the abundance of credit in the late 1970’s and the credit
restrictions faced by Mexico during the 1980’s that lasted until the early 1990’s.
During this period Mexico also faced deep recessions and huge economic booms. If
we consider all this, the government went through very different scenarios, but the
preferred behavior was to run a procyclical fiscal policy most of the time. My
regressions show that the only sexenio that has not followed a continued procyclical
fiscal policy was from 1988-1994, when the economy was recuperating from the debt
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crisis. From 1994 to 2000 fiscal policy returned to a procyclical behavior. Further
analysis of the most recent sexenios will be the main departure point for my post
doctoral research. Choosing this period does not bias the procyclical results found in
terms of my analysis of the cyclicality of fiscal policy.
The dissertation is organized as follows. Chapter I provides a brief overview of
economic theory with respect to fiscal policy and explores the insights of the political
economy literature with regard to procyclical fiscal policy. Chapter II analyzes the
different pressure groups in Mexico, the role they have played in policymaking and
how have they been affected throughout the different sexenios under study. Chapter III
offers supporting empirical evidence on the cyclicality of Mexico’s key public
spending variables, and it links my argument to that of Talvi and Vegh (2000).
Chapter IV finds no evidence of the existence of a political business cycle in Mexico
using empirical data and develops some empirical proxy-variables for measuring the
degree of pressure exerted by interest groups. Chapter V gives a brief overview of the
period generally called ‘Stabilizing Development’ for a better understanding of the
subsequent sexenios. Chapters VI through VIII provide in-depth analyses of the
sexenios of Echeverria, Lopez Portillo and de la Madrid. Finally, chapter IX offers
some concluding comments.
ii. Fiscal Policy and the Business Cycle
Economists may be generally divided into two groups, counter
cyclical/Keynesians versus advocates of tax-smoothing with respect to the
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hypothesized relationship between fiscal policy and the business cycle. Those
Keynesians who favor countercyclical fiscal policy argue that the government should
either increase spending and/or reduce tax rates during recessions in order to stimulate
aggregate demand and discourage the under-utilization of resources for prolonged
periods of time. During expansions the government should do just the opposite, in
order to contain inflationary pressures and prevent the economy from over-heating.4
According to this perspective, during booms, government spending should
decline as a proportion of GDP and, conversely, it should increase during recessions.
This follows the consumption-smoothing hypothesis which argues that the
government spending function should take as its basis permanent income, not current
income. If the government is concerned about smoothing the path of production and is
perceived as being capable of stabilizing output, it will seek to operate a
countercyclical fiscal policy. The general idea is that a negative shock to demand for
domestic goods can be partially offset by an increase in government demand. In the
same way, the government will want to contract its activities during a boom period, in
order to cool off the domestic economy. Another reason for contracting during a boom
is that the social insurance component of government spending is naturally
countercyclical. Unemployment benefits and other programs of that nature are
designed to offset fluctuations in income and therefore should be negatively correlated
with the economic cycle. After all, the primary function of these programs is to offer
insurance when hard times hit. In a world of uncertainty, there are prudent reasons to
4 See Stein et al. (1998).
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run a countercyclical fiscal policy. Governments do not know when shocks will occur,
or how long they will linger, as was the case with the 1982 debt crisis. Some
judgment calls will thus be necessary in planning expenditure programs for the future.5
The tax-smoothing model, inspired by Barro (1979), posits that policy should
remain essentially neutral regardless of the business cycle and governments should
respond only to unanticipated changes that affect their budget constraints.6 Barro
argues that the distortionary costs of taxation, coupled with a countercyclical program
of government spending (as a ratio of GDP), generates tax smoothing as the optimal
fiscal policy. For example, under Barro’s scenario, a constant tax is chosen7 (which
avoids the intertemporal distortion that would arise if tax rates were to change over the
economic cycle), so that the budget is, on average, balanced over the economic cycle.
As a consequence, tax revenues as a ratio to GDP are acyclical - with a constant tax
rate, revenues rise sharply during a boom and decline during a recession. However,
given the countercyclical path for government spending and the acyclicality of the tax
to GDP ratio8, the budget deficit behaves countercyclical^.9
To summarize these two positions, if policymakers followed Keynesian
guidelines, we should observe over the business cycle a positive correlation between
tax rates and output, and a negative correlation between government spending and
5 Lane (1998).
6 Talvi and Vegh (2000).
7 In this case: Taxes (T) remain constant, and the ratio exp/GDP J ,, if GDPj.
* Lane (1998).
9 Budget deficit in times of recession and budget surplus in times o f boom.
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output.1 0 Under the tax-smoothing model, and if policymakers followed Barro’s
guidelines, those correlations should be very low, approaching zero.1 1
iii. The Political Economy of Procyclical Fiscal Policy: The Mexican Case
In spite of these economic arguments, Mexico has followed a procyclical fiscal
policy during the last 30 years (as discussed by Talvi and Vegh 2000, Stein et al 1998
and Tornell and Lane 1994). The assumption here is that the Mexican economy would
have performed better if it had followed either of the two economic prescriptions
mentioned above, instead of taking a procyclical path. The procyclicality of fiscal
policy has led Mexico to overspend in economic booms and to wrack up an enormous
debt. During crises the government has tightened expenditures, plunging the economy
into deeper and more lasting recessions.
Controlled by the same Institutional Revolutionary Party (PRI) for seventy
years, various Mexican administrations fluctuated in their support for different interest
groups over time.1 2 However, despite the fact that Mexico has had a political system in
which the major party was not seriously challenged until 2000, fiscal policy outcomes
have been similar to those of other Latin American countries where domestic politics
have been less stable. In Mexico, the demands of big and small capital, workers,
peasants, and state managers have propelled this outcome, suggesting that regardless
of seven decades of semi-authoritarian rule, interest groups still influence fiscal policy
1 ( 1 If G D Pf— ► T 'f, and if G D Pt^expJ,.
1 1 Talvi and Vegh (2000).
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changes over time. The aim of this dissertation is to link this procyclicality of Mexican
fiscal policy to a political economy argument, since it is clear that even a semi
authoritarian government does not have complete autonomy in the decision making
process.
Several works have analyzed the dynamic interaction between government and
interest group pressures, reaching beyond the traditional explanation of credit
rationing. For example, Talvi and Vegh argue that if fluctuations in the tax base are
small, then spending pressures will not play much of a role and full tax smoothing will
hold as an approximation. In contrast, when fluctuations in the tax base (and hence in
the budget surplus) are large, political pressures become harder to resist and will have
a major impact on fiscal policy. This implies that the greater the variability of the tax
base, the more procyclical the fiscal policy will be. This is the situation that Mexico
still faces, where fluctuations in the tax base are large, and political pressures mount
during times of plenty.
In the Talvi and Vegh model, the procyclical response of fiscal policy leads to
fluctuations in consumption and output. Policy-induced volatility thus reinforces the
instability of the underlying economic environment. However, it would not be entirely
correct to blame policymakers for unstable macroeconomic policies. Rather, their
model suggests that the root of unstable policies may lie in the political economy of
fiscal arrangements, which means that the problem is more than a matter of
policymakers’ inability to set the “correct” policies. During recessions, it might appear
1 2 See Maxfield (1990), Teichman (1988), Neiman Auerbach (2001), Thacker (2000), and Williams,
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as though the economy is not borrowing enough, which may be misconstrued as
evidence of the low access to international credit markets (i.e. credit rationing).
However, it is the inability of the government to generate large enough surpluses
during expansions that forces it to borrow less during recessions - relative to a full-tax
smoothing rule - in order to satisfy its solvency constraint.
In a larger sense, I argue that policy outcomes are also the result of the choices
of interest groups and the direct pressures they exert on the policymaking process. As
Jeffry Frieden has argued,1 3 policymakers provide more resources to those who exert
the most pressure on them or are effective in conveying a message of threat to the
government’s objectives. At the same time, the pressures interest groups exert on
policymakers are proportional to their expected relative gains. Fernandez and Rodrik
(1991) explain that governments often fail to adopt policies that economists consider
efficiency-enhancing, because of a ‘non-neutrality’ in the distribution of the gains and
losses to pressure groups. They argue that after lobbying for the adoption of a policy,
the gainers from the policy are taken to be politically ‘strong’ and the losers to be
politically ‘weak’. In pressure-group models, this non-neutrality typically expresses
itself in the form of different organizational abilities. For example, the gains from the
policy may be concentrated amongst a small number of individuals, while the losses
are diffused. The effectiveness of lobbying is therefore limited by the diffuseness of
the projected benefits.1 4
(2001).
1 3 Frieden (1991).
1 4 Fernandez and Rodrik (1991).
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This dissertation argues that Mexican fiscal policies since 1970 reflect the
economic interests of the country’s most powerful groups. In other words, fiscal
policy outcomes can be attributed to the pressures exerted by interest groups on
policymakers. Frieden (1991) argues that government policy enters into virtually all
explanations for why countries develop differently. As Frieden sees it, “Political
pressures lead politicians to pursue policies that affect economic activity.”1 5 Or, more
ominously, powerful groups deliberately manipulate the state apparatus to seek their
own benefit. From this it follows that if economic success or failure derives from the
policymaking process, it is essential to explain the process by which these are decided.
My study focuses specifically on those fiscal policies followed by Mexico during the
period from 1970 to 1988. I analyze how policymakers responded to pressures by
interest groups, and how they used fiscal policy as leverage to deal with these
pressures. Given the generally suboptimal pattern of Mexican fiscal policy since 1970,
this study also analyzes the ways in which special interests used their own leverage
against the government in securing fiscal policies that were procyclical on balance.
There are certain spending categories that are beneficial to specific groups in
society. What matters most, and to which groups? As Frieden argues, bankers prefer
conservative spending policies that favor low inflation and economic stability. The
non-financial business sector is most concerned about government investment in
infrastructure and energy subsidies. Workers will push for higher social expenditures,
various government subsidies and the expansion of public goods. Peasants gain from
1 5 Frieden (1991), 18.
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price supports in agriculture, rural infrastructure, social protection, and cheap credit
from the state. Some of these spending policies benefit other groups besides those that
are specifically targeted, for example those that fall into the category of non-divisible
public goods.
One way to gauge the power that these various groups have is to track their
effectiveness in getting the government to increase spending in their preferred
categories during boom periods. Similarly, when there is a crisis, it is telling to see
which groups are able to limit a reduction of government spending in categories that
most directly affect them. In Mexico, there is evidence that interest groups ease their
pressures on the government during times of economic crisis, which enables the
government to reduce spending. This occurs because such groups readily understand
that fiscal restraint is the only course of action for a government operating under
conditions of capital scarcity; any other policy response would be reckless, and thus
threaten to worsen the economic conditions overall and, therefore, their own
situation.1 6
Talvi and Vegh explain that it is not unusual for finance ministers in Latin
America to argue that the potential for misusing resources in good times is preferable
to avoid large surpluses by lowering taxes during boom periods, thus allowing the
private sector to use those resources as it sees fit.1 7 They note that the transparency of
the budgetary process affects fiscal deficits to the extent that the budget provides an
lfi Personal interview with Pedro Noyola, M exico, D.F. ( May 27, 2003).
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accurate representation of projected expenditures, revenues and deficits. But they also
caution that the various agents involved do not always have the incentive to be
truthful. In order to hide deficits, governments may overestimate the growth of the
economy, or a fiscally conservative finance minister might want to hide resources
from the line ministries and the legislature.
Mexico has faced these problems since the winding down of the Stabilizing
Development model in the early 1970’s. As former Ministers of Budget and Planning,
both Miguel de la Madrid and Carlos Salinas de Gortari, who was President from
1988-1994, massaged the data and hid the government’s financial difficulties when
reporting them to the executive. Since they represented a spending ministry, they
overestimated growth and underestimated deficits in order to appease those pressure
groups that benefited from public spending.1 8 Big capital, state workers, and labor
unions were among the groups that perpetuated this behavior.
Another significant cause of procyclical fiscal policy is that the main spending
ministries are subject to sectoral interest group pressures that favor increases (financed
by national resources) for programs that most affect them. In a dynamic setting, this
leads to excessive deficits and debt accumulation. Spending ministers’ behavior is
further reinforced by the fact that their power within the government is usually
measured by the size of the budget they manage. In principle, finance ministers must
face the reality of budget constraints; moreover, since they bear the ultimate
1 7 Talvi and Vegh (2000). This justification for chronic tax adjustments to avoid surpluses was
repeatedly stated by Domingo Cavallo (who was the finance minister of Argentina 1991-1996 and
2000-2001). (Ambito Financiero , January 5, 1999).
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responsibility for macroeconomic policy, they have stronger incentives to promote
fiscal discipline.1 9 Nevertheless, in practice, sectorial pressures and interest group
lobbying have persistently overcome these principles, leading to excessive deficits and
debt accumulation.
This was precisely the situation in Mexico during the sexenios of Echeverria
(1970-1976) and Lopez Portillo (1976-1982), when the cabinet members promoted
different approaches to fiscal policy. From 1970-1973, the Finance Minister was Hugo
Margain, a conservative economist and ally of the big capital group. At the same time,
the main figure of the cabinet, the National Patrimony Minister, was Horacio Flores de
la Pena, a well-known leftist who wanted to solve the country’s problems via
government spending. Not surprisingly, he was supported by labor and peasants, the
traditional allies of the left, and President Echeverria. De la Pena and Margain became
locked in a tough fight for ideological supremacy, as the former pushed for more
spending and the latter tried to resist. In the end, Margain was dismissed from his
position and replaced by Lopez Portillo, a politician that would agree to the spending
ambitions of the administration and be ‘hand picked’ by Echeverria for the presidency
in 1976 as his reward. This was a clear example of a Finance Minister trying to uphold
sound fiscal policy guidelines, but being thwarted by societal pressures and highly
effective interest group lobbying.
During the Lopez Portillo administration, something similar occurred. A
powerful group in the cabinet challenged Finance Minister Rodolfo Moctezuma’s
1 8 Castaneda (2000).
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conservative fiscal stance. Carlos Tello, Minister of Budget and Planning and National
Patrimony Minister, Jose Andres De Oteyza, looked to expand the government’s role
and spending in the economy. At the same time, the state oil company (PEMEX)
director, Jorge Diaz Serrano, launched a plan for massive oil industry development.
Again, labor and peasants supported this view but this time other groups, including
unionized oil workers and powerful industrialists who were profiting handsomely
from the spending spree caused by the 1979 oil price boom, joined in their support.
The result was that Moctezuma was ousted from the Finance Ministry and his
successor, David Ibarra, faced the same budget expenditure pressures and was pushed
to overspend until the 1982 debt crisis exploded. Thus, pressures from within the
government, as well as the constant pull from societal groups, have converged to
perpetuate a pattern of procyclical fiscal policy in Mexico. The fiscal restraint and
policy continuity that characterized the Finance Ministry during the 1950’s and
1960’s, and which was the very pillar of Mexico’s Stabilizing Development model,
was all but over as the country entered the 1970’s. Whereas the pre-1970 era saw the
tenure of one powerful Finance Minister, there were six finance ministers under
Echeverria, Lopez Portillo and de la Madrid.
But fiscal policy in Mexico has also varied considerably over time, some of
which can be attributed to the business cycle. Within the general scenario of a
procyclical fiscal policy in Mexico, we would expect that variables affected by or that
affect strong pressure groups would show a smaller variance with respect to the
1 9 In Stein et al. (1998).
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business cycle than those that affect weaker groups. For example, variables like
private investment and wages are naturally procyclical, while government
expenditures in capital and public works would be expected to behave more
countercyclically. Especially during recessions, the latter should experience larger
increases, while at the same time social expenditures should behave more
countercyclically as they act as a cushion for groups at the lower end of the economic
scale. When government expenditures behave in the opposite way, or in a pro-cyclical
manner, this means that fiscal policies may be affected by pressure groups. In other
words, the policies adopted are those that most benefit the more effective pressure
groups and not those policies that are optimal for the economy as a whole.
Stein et al. argue that with a hegemonic authority, like a strong Finance
Minister, such pressures would diminish. Talvi and Vegh, however, argue that it is
easier for a Finance Minister to dismiss spending pressures in times of crisis by simply
pointing to the lack of resources in bad times, but when fiscal resources are abundant,
spending pressures multiply and typically force the Finance Minister to yield to some
of these demands. Linking these two arguments, strong Finance Ministers should be
better able to resist pressures in periods of crisis than in periods of boom. Along the
lines of Talvi and Vegh’s argument, in the case of Mexico, the Finance Minister
resists pressures in periods of crisis, and instead launches the strict austerity plans, but
not in booms, as these periods reflect a record of overspending. The difference here is
that, in some instances, the Finance Minister has not been the most powerful person in
the cabinet, and his decision-making power has been challenged by other ministers.
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The now defunct ministries of National Patrimony and Budget and Planning were
powerful rivals of the Ministry of Finance and frequently won the battle to overspend
with the President’s blessing.
Stein et al. find that budget procedures which include constraints on the deficit
introduce hierarchical elements into the budgeting process and are more transparent,
and lead to lower deficits and lower debt. Hierarchical rules are those which set
restrictions on the power of Congress to modify the budget proposed by the Executive,
in particular with respect to the size of the budget and the deficit. At the execution
stage, hierarchical rules are those that limit the initiative of Congress to propose
increases in the size of the budget once it has been approved. In other words,
hierarchical procedures refer to those that tend to concentrate more power in the
Finance Minister, vis-a-vis other ministers, and in the Executive, vis-a-vis Congress.
But they do not find that strong budgetary institutions can neutralize the potentially
adverse fiscal consequences of proportional representation on fiscal deficits and debt.
Mexico presents similarities, but at the same time differences, with this kind of
system. The Finance Minister was the most powerful figure in some administrations,
for example during the Stabilizing Development era, but lost power when more
populist economists took control over the government starting in 1970. From that
point on, the President sought direct control over the country’s finances and some of
his closest allies advocated for more relaxed fiscal policies. For most of the PRI’s
tenure, Congress was a second tier entity, while the president and his cabinet held
most of the economic decision making power. As President’s like Echeverria and
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Lopez Portillo leaned heavily on their more spending-prone ministers, fiscal deficits
reached previously unimagined levels. The losers in this political economy game were
the more prudent finance ministers, who found themselves isolated in subsequent
administrations.
Table 1.1 offers a brief overview of some of the most relevant Mexican
economic indicators for the period 1935-1994, to give an idea of the economic
performance of the country during each presidential term. It is striking to see the
differences that GDP growth and GDP per capita register after 1982, starting in 1976.
The minimum wage declines, while inflation, exchange rate parity and public debt
literally slip out of control during the Echeverria administration. It is clear that
Mexico’s economic performance changed abruptly during the Echeverria
administration and this is why I chose to study the period from 1970-1988 in this
dissertation. While the PRI in Mexico ruled over the 18-year time span of my analysis,
the party still had to cater to different groups within and outside of its control. Thus,
even a heavily entrenched single party needed to use the budget as a main lever to
retain power, and this fostered a procyclical pattern of fiscal behavior more akin to
that of a political system based on proportional representation. As can be seen in Table
1.1, the post-1970 period marks the end of sound fiscal and monetary policies in
Mexico. Stabilizing Development, although not perfect, in that it had marginalized
some sectors of the population, in both the political and economic spheres, had
achieved economic stability combined with high growth. But it was clearly winding
down by 1970, as the policy thrust shifts from a model based on a controlling state to
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one more oriented toward negotiating terms of participation. The state and the ruling
party lost its footing, and the political winds shifted in favor of appeasing all of the
interest groups that had been excluded from the political process prior to this time. The
year 1988 marks the point when an outward looking development strategy finally took
the place of the previous Stabilizing Development model, along with the explicit
adoption of a neo-liberal economic program. Thus, this dissertation seeks to
understand the period 1970-1988 as a long transition in Mexico’s economic
orientation, and it does so by focusing on the crucial question of the state’s role in the
fiscal policy process.
Table 1.1 Macroeconomic Indicators by Sexenio
Sexenio GDP Total1 GDP per Capita1 Minimum W age2 Inflation3
Cardenas 1935-40 30.1 17.4 22.6 35.8
Avila Camacho 1941-1946 42.9 21.4 -39.3 123.0
Aleman 1947-52 39.9 18.1 13.1 74.9
Ruiz Cortinez 1953-58 44.9 20.8 28.7 38.9
Lopez Mateos 1959-64 47.5 21.1 60.5 14.4
Diaz Ordaz 1965-70 48.8 23.1 30.7 17.6
Echeverria 1971-76 43.1 18.2 30.6 126.3
Lopez Portillo 1977-82 42.2 20.5 -26.0 517.4
De la Madrid 1983-88 1.1 -10.8 -40.1 5164.3
Salinas 1989-94 15.3 3.9 -19.5 116.9
Source: Calva (1993).
N ote: P ercentage grow th during the sex en io .
1. Constant prices of 1960 until 1976, constant prices of 1970 from 1976-1987, constant prices of
1980 1988-1994.
2. Deflacted from INPC Nov. 1978=100; for 1934-64 1954=100 from extrapolation o f the Price Index
survey for Mexico City.
3. INPC at November, 1970-1994, for 1934-1970 Price Index o f Mexico City, 1954=100.
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Table 1.1 (continued)
Sexenio Gross Fixed
Investment1
Real Minimum
Wage2
Exchange Rate Parity
Peso/dollar
Public Debt3
Cardenas 1935-40 34.5 48.6 4.9 238.8
Avila Camacho 1941-46 88.2 29.5 4.9 240.6
Aleman 1947-52 129.6 33.4 8.7 382.2
Ruiz Cortinez 1953-58 173.1 42.9 12.5 798.0
Lopez Mateos 1959-64 287.6 68.9 12.5 2,056.0
Diaz Ordaz 1965-70 487.0 90.1 12.5 4,262.8
Echeverria 1971-76 696.4 117.7 20.0 26,100.2
Lopez Portillo 1977-82 1070.4 87.1 70.0 77,981.2
De la Madrid 1983-88 821.1 46.5 2,284.7 96,513.8
Salinas 1989-94 1124.5 38.4 3,191.6 117,382.0
Source: Calva (1993).
Note: Values at the last year o f the sexenio.
1. Billion pesos of 1980 on the last year o f the sexenio.
2. Data of November o f the last year o f the sexenio.
3. Current million dollars
Table 1.2 gives a brief summary of the fiscal policy followed by each
administration during the period 1935-1994. We can see that fiscal policy has
fluctuated between procyclicality and acyclicality. The support base for presidents has
also varied extensively through time and different interest groups have been favored
by each administration.
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Table 1.2 Fiscal Policy Tendencies by Sexenio
Sexenio Fiscal Policy Comment
Cardenas 1935-40 procyclical Populist, increased the role o f the state,
supported by workers and peasants, big
spender
Avila Camacho 1941-46 procyclical Favored the private sector, moderate spender
Aleman 1947-52 procyclical Ally to the big capital, big spender
Ruiz Cortines 1953-58 acyclical Controlled spending, supported by labor and
peasants
Lopez Mateos 1959-1964 acyclical Supported by labor, peasants and private
sector, followed conservative fiscal policies
Diaz Ordaz 1965-1970 procyclical Favored big capital, increased spending
moderately
Echeverria 1971-1976 procyclical Populist, favored labor and peasants, big
spender
Lopez Portillo 1977-1982 procyclical Populist, shifted his support from big capital
to labor, big spender
De la Madrid 1983-1988 procyclical Started the transition to an open economy,
supported big capital, contracted spending
Salinas 1989-94 acyclical Completed the opening o f the economy,
supported big capital, moderate spending
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II. Pressure Groups
i. Introduction
Throughout this work the terms ‘interest group’ and ‘pressure group’ will be
used interchangeably. By a pressure or interest group, I am referring to a set of
individuals or organizations whose members act together to influence public policy in
order to promote their common interests. In this study of pressure groups I employ a
political economy approach that analyzes how rational self-interested actors interact
within existing institutional settings to affect social outcomes. I assume that actors are
rational since they seek to maximize their utility within constraints of the environment
in which they interact. I also assume that income maximization drives economic
policy preferences.1 Therefore, pressure groups are assumed to rationally calculate
their policy preferences as a function of their goal of maximizing their incomes given
their positions in the economy. This is why even though entrepreneurs and workers
want to maximize their utility they do it in different ways, therefore supporting
different fiscal policies. For example entrepreneurs might prefer taxes to be paid
entirely by workers, while workers might prefer that all taxation should fall on capital.
Some groups might be benefited by trade liberalization, while some others might be
negatively affected, and so on.
Groups own assets which provide them earnings which depend on relative
prices. This means that owners of assets prefer low costs and high profits. The extent
1 Frieden (1991), 15.
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to which an asset-holder tries to influence policy depends on the ways in which a
given policy will affect returns on the asset, and on the mobility that the asset might
have. This is a function of specificity. This means that groups who have more specific
or less mobile assets will be more eager to influence policy, since certain policies
followed by the government affect them directly and it is very costly to move from
one asset to another.2 The use of political economy has the following objectives:
defining the actors and their goals, specifying actors’ policy preferences, determining
how they group themselves, and explaining their interaction with other interest groups
and the government. Here, I consider the government (state managers) as a group in
and of itself, mainly because state managers are the ones that have to deal with the
pressures and are responsible for the final decisions, and thus have interests vested in
the policy process. So, I am analyzing both the demand and the supply side of the
process, i.e. interest group-government interaction and vice-versa.
This chapter analyzes the origins, organizations, and relationship between
these pressure groups and the state. How these pressure groups influenced fiscal policy
in Mexico in the period from 1970 to 1988, as I recount the most important episodes
of each sexenio and the reactions of each group. The empirical analysis to find
evidence to confirm the positive correlation between the pressure that these groups
exerted and the procyclical pattern of fiscal policy is presented in chapter IV, where I
choose proxy-variables for these interest groups in an effort to measure the pressure
they exerted to the government during the period under study. I ran regressions of each
2 Ibid., 19.
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one of these variables and compare those results to government spending in specific
categories. In this way I try to measure the degree of influence those pressures had
over government spending. Finally I create a model to detect if there is evidence of the
existence of political business cycles in Mexico. Along these chapters, I focus on the
expenditure side of the government’s fiscal policy and in line with the existing
literature on the topic, I will draw a relationship between interest group pressure and
high government spending during booms and steep public expenditures cuts during
recessions. With this said I will now turn to an analysis of how these groups affected
fiscal policy and contributed to the procyclical behavior that stands out during the
period under study.
ii. Pressure Groups
Interest groups are formed when a set of individuals or firms share economic
characteristics, like asset specificity. Some interest groups come together more easily
-2
than others, and this can be a collective action problem. Frieden explains that
successful collective action depends on the degree of asset specificity that surrounds a
given interest group. The more concentrated the industry, the more easily we would
expect it to be able to exert political pressure. The credibility and costs of interest
group threats to the government and the costs and benefits of the government
supplying the policy are big factors in their success when pressuring the government.
These costs are a function of the resources the government must spend to supply the
3 Olson, (1965).
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policy, which decline as more resources become available. Pressure groups can work
together with government agencies, forming coalitions within the state to achieve
common interests.4
Political coalitions make policy, and state and social actors form coalitions
within a given context. Coalition politics links economic policy to state institutions,
society, and the international system. The relations among each of these aspects of
contemporary political economy are interactive and dynamic, constantly shaping and
reshaping one another over time.5 Pressure groups tend to form policy alliances on
certain issues that they agree upon, these alliances are generally short lived. Pressure
groups tend to focus on their respective matters of concern after the policy has been
implemented or defeated. Coalitions are generally of a longer term and they bring
together interest groups that have common long-term goals. These groups realize that
by coming together as a coalition they have a better chance of being effective in the
pressure they put on policymakers to favor the economic or political policies that
would benefit them. Thacker explains that the attractiveness of a given private sector
actor as a potential coalition partner depends on its relative power to influence
decision-making.
The Mexican government has shown a special vulnerability to capital flight
through the years. This tool has been used effectively by certain interest groups to
pressure the government to follow policies that benefit them. The group that controls
this variable ‘par excellence’ is the bankers’ group. In my study this group had more
4 Frieden (1991).
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leverage than the other interest groups until it was strapped by the government’s bank
nationalization in 1982. This event left the door open for other groups to strengthen
their position before the government.
For Frieden and Thacker, the structural leverage of the groups that control
mobile capital vis-a-vis state policy makers varies according to the international
mobility of capital that a given country faces. Capital mobility depends on the
country’s location in the international economy, its domestic asset bases, and its
macroeconomic policies. Even geography is important. In the case of Mexico, which
shares a huge border with the United States, taking money out of the country is easy
and it represents a credible threat to the government for destabilizing the country by
the private sector. When barriers to capital movement fall, political and economic
influence accrues to the holders of the largest amounts of the most mobile assets.
Holders of liquid capital will see their leverage increase as a result of changes in
capital mobility, and they will become more attractive as part of a coalition.6 This
makes the private sector and its different groups very important actors in economic
decision making.
Political and social actions of pressure groups are reflected in any public
policy. At the same time, these groups are affected by the state bureaucracy as they
interact with each other in defense of their own interests. Each government agency has
close ties with certain interest groups developing a tight relationship as they support
each other in the undertaking of economic decisions and pursuance of their interests.
5 Thacker (2000).
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Every time that a structural change takes place, it changes at least some part of the
government’s apparatus. So reforms may strengthen or weaken the government’s
structure. In this way, politics and economics, in both the short and the long run,
converge. The government is a social agent that acts as a clearinghouse for pressures
by social groups. So a main duty of political institutions is to achieve structural
changes that improve their effectiveness and the collective welfare.7
Solis explains that the government faces political constraints from pressure
groups that use their power to support or oppose planned actions and influence
policies. These groups form the institutional environment with which the economic,
political, and bureaucratic apparatus interacts. The groups often enter into coalitions
and, thus, make their opposition or support to certain policies even stronger. The
following are the groups that have been identified by the author and a brief
explanation of their origins.8
iii. Big Capital
a. Origins
In Mexico, big capital had its origins in the Porfirian era. It was formed by
bankers and big industrialists who, unlike landowners, survived the 1910 revolution
with much of their wealth intact. After the revolution, they helped to reconstruct the
Mexican economy. Both bankers and industrialists worked closely with the Finance
6 Thacker (2000).
7 Solis (1981), 97.
8 Ibid.
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Ministry to create financial institutions, stabilize monetary policy, and raise funds for
the creation of the Central Bank.9 The banker’s group was formed by the major
stockholders of banks, which at the same time had strong interests in industrial
conglomerates, leading to the formation of the so-called ‘grupos economicos’.
Therefore, this group held assets across a number of sectors including, banking,
industry, real estate, insurance and commerce. Generally, bankers were the leaders of
the so-called ‘grupos’. This was an elite group, as its members had a lot of economic
power and influence on government. Their power was based on the economic
importance of their assets, their investment clout, international credit access and on the
fact that some bank managers had careers in the public sector and state managers
joined their banks as well.1 0
In the early 1970’s, Mexican capital was heavily concentrated and was
dominated by a small number of large financial-industrial conglomerates. They varied
in their form of integration. Some were fully integrated financially, legally, and
administratively. Some were integrated merely through stockholding.1 1 In his survey
of corporate boards Camp confirms that there was a high degree of overlap between
the boards of banks and those of major industrial companies.1 2 This was important
because, given this linkage, industrialists did not have to rely on the state to finance
economic expansion. They became relatively immune to state efforts to guide
industrial development by manipulating the price or quantity of money.
9 Maxfield (1990).
1 0 Camp (1989), 155.
1 1 Maxfield (1990).
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The asset diversity held by this big capital group reduced the asset specificity
that they might have otherwise had, but at the same time their capital was not as
mobile as might generally be characteristic of bankers. Within the bankers, there were
differences among them in the importance of banks to their overall business. The most
notable difference was between the two major banks of the country, Bancomer and
Banamex, and the rest. Together, by 1980, these two entities owned 33% of total
banking offices in the country, 50% of the resources of the banking system, and 56%
of the country’s utilities. Below them were Serfin, Somex and Comermex terms of this
echelon. Together, the five largest banks of the country controlled 75% of total assets
1 T
of the banking system. This shows the diversity of the sector and of the bankers
group. Bancomer and Banamex had much more to lose in any policy action against
them, since they were the major businesses within their respective groups, while
Serfin was part of the Visa and Vitro groups of Monterrey, Somex was state owned
and Comermex was part of the Chihuahua group.
Within big capital, the bankers’ group was one of the most dominant interest
groups in the country and was especially influential during the 1950’s, 60’s and 70’s.
However, the bankers’ group as a political force came to an abrupt end on September
l st1982, when President Lopez Portillo nationalized the banking system. Because of
this, bankers were left without their business and although many of them had interests
in other businesses, their power as the bankers’ group would never be the same. The
interests of the former members of the bankers’ group thus changed after the
1 2 See Camp (1989).
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nationalization. Those whose main business was other than banking, turned to their
industrial, commercial and mining interests.
A more visible export-oriented group also emerged during the 1980’s, joined
by producers who realized that the state would not back down from its free trade
policies and the opening of the Mexican economy. This group was consolidated during
the 1990’s under the Salinas administration. The members of this export oriented
group were the big industrialists who foresaw great economic opportunities in the
international market. Groups like VISA, CEMEX, VITRO, DESK and the auto
industry were among the first to support free trade. So big capital has basically been
the same, but it has adapted to changing economic circumstances and pushed for
modifications to improve its own economic position.
b. Ideology
Traditionally, big capital group has embraced a ‘liberal’ or ‘monetarist’ policy
current, opposing labor rights and state intervention in the economy and holding
monetary stability sacred, as Maxfield explains. This group has also pushed for an
orthodox macroeconomic policy, promoting relatively unregulated private financial
markets, free exchange convertibility, tight monetary policy and virtually no taxation
of profits or luxury goods.
The bankers’ group strongly supported moderate fiscal and monetary policies.
The threat of capital flight was one of the most powerful tools that big capital had
1 3 Colmenares et al. (1982), 46.
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34
against the government and it used it every time it faced an unfavorable policy. Capital
flight was made easy by the huge border that Mexico shares with the United States,
making it very difficult to control. The bankers argue that for a better performance of
the economy, price stability is of great importance and that a private unencumbered
financial system is the most efficient way to allocate resources to investors.1 4
The closest allies to big capital in influencing Mexican policy-making have
been the Finance Ministry and the Central Bank. Maxfield explains that, “these two
state institutions became the strongholds of the bankers’ group within the government”
and have established their supremacy over the other state economic policy-making
agencies.1 5 Together they form an alliance, which identifies with the same economic
principles and push for conservative fiscal policy.
The ‘grupos’ tend to act on their own when it comes to political pressures.
They usually have direct access to the top spheres of the government and their
collective voice is generally heard. The ‘grupos’ have been the beneficiaries of many
state policies and have acted under its wing for most of the time since the end of the
revolution. Traditionally businessmen from the north of the country have been the
most outspoken and critical of the government. In general they are more combative
and antagonistic than the bankers or ‘grupos’ from the central part of the country.
During the de la Madrid administration the big capital philosophy suffered an
adaptation to the trend that economic policy making was taking, and many of the
‘grupos’ became supporters of free trade as it was advocated by the government. They
1 4 Maxfield (1990).
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35
became the closest ally of the Commerce Ministry and played an important role in
joining the GATT as they oriented their efforts to the export market and prepared to
compete more fiercely in the globalization era, of which Mexico was to become a part.
This was partly helped by government support in the form of subsidized energy and
credit, export promotion, while keeping wages artificially low.
c. Organizations that Represent Big Capital
The bankers had their own organization which represented them as a group in
political matters until the bank nationalization in 1982. After the reprivatization of the
early nineties, this organization was revived but with less success than before. This
organization is the Mexican Bankers Association (ABM) and was founded in 1928.
Almost every financial institution in the country is represented in the ABM. The pre
expropriation ABM was private and was one of the most prestigious organizations in
the country.
The ABM held an annual assembly that became one of the most important
forums of the country, since the decisions taken there had a real effect on the country’s
economy prior to the bank nationalization.1 6 The Finance Minister and the Governor
of the Central Bank attended every assembly and exposed their ideas for economic and
financial policies in representation of the government. In general ABM members were
careful in their declarations and moderate in their criticism against the government.
1 5 Maxfield (1990).
1 6 Arriola (1988).
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Table II. 1 shows the names of the presidents of the ABM from 1970 until the bank
nationalization.
During the mid-1980’s a new financial class emerged, the owners of the fast
developing business of brokerage firms. They formed the Mexican Association of
Brokerage Firms (AMCB) before the bank nationalization, but it was only after this
event, and after the impetus received from the government and the independence given
to the stock market that the AMCB acquired notable importance and public presence
as a specialized organization.1 7
Table II.1 Mexican Bankers Association (ABM) 1970-1982
Presidents Tenure
Rolando Vega Iniguez 1969-1970
Manuel Cortina Portilla 1970-1971
Manuel Espinosa Yglesias 1971-1972
Jose Maria Cuaron 1972-1973
Agustin F. Legorreta 1973-1974
Jose Pintado Rivero 1974-1975
Manuel Cortina Portilla 1975-1976
Ruben Aguilar Monteverde 1976-1977
Eugenio Erana Garcia 1977-1978
Carlos Abedrop Davila 1978-1979
Rolando Vega Iniguez 1979-1980
Arcadio Valenzuela 1980-1981
Victor Manuel Herrera 1981-982
Carlos Abedrop Davila 1982
Source: Camp (1989).
1 7 Luna (1992).
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37
After the nationalization, the AMCB started negotiations with the government
in 1984 with the support of the Entrepreneurial Coordinating Counsel (CCE) to
influence the planned financial legislation reform. With the triumph of the concept of
a specialized financial system, this group became one of the pillars of the CCE. Soon
thereafter, the Mexican government gave its support to the brokerage sector. It
consolidated the institutionalization of the brokerage firms, and promoted their
growth; the government also offered the AMCB privileges of every kind, including tax
exemptions and legislation to expand their markets. The AMCB was now allowed to
own industrial firms and promote their expansion, and enabled them to enter areas
previously restricted to brokerage firms. The outcome was a sector that was strong,
dynamic, arrogant, and capricious. This group especially exerted its pressure in
• • • 18
economic policies. Their principal allies in the government were the technocrats that
were placed in the most important economic positions during the de la Madrid
administration and thereafter.
Some of the private sector organizations were created almost a century ago, as
a number of chambers of commerce had emerged during the revolutionary years.
Under the initiative of Manuel J. Pani, Minister of Industry, Commerce and Labor at
the time, the National Confederation of Chambers of Commerce (CONCANACO) was
formed in 1917, and the Confederation of Industrial Chambers (CONCAMIN),
composed of large industrialists was formed in 1918. Pani’s objective was to promote
the collaboration between the private sector and the state. There was a need to
1 8 Proceso 573, October 26 1987
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38
organize these groups, so that dialogue with the government would become easier.
Today, they represent all general commerce and industrial interests, promote growth
and push for the implementation, modification or nullification of laws that affect
them.1 9
The Confederation of Employers of the Mexican Republic (COPARMEX) was
independently founded in 1929 by the Monterrey group in the north, specifically under
the initiative of Luis G. Sada, then director of the Cuauhtemoc Brewery, as a reaction
to the Federal Labor Law which its founding group opposed. As an organization it
served to improve relations with the labor unions. Historically it has been the most
combative and outspoken of all the major private sector organizations, has been the
most confrontational towards the state, and has assumed more conservative positions
compared to other organizations in its efforts to narrow the state’s economic influence.
From its start, COPARMEX was an organism for political action of the Mexican
bourgeoisie. Its most representative members were businessmen from Puebla and
20
Monterrey, but it was composed by thirty-five Employer Centers, local chambers
and professional associations in different cities, which brought together industrialists,
merchants, agriculturalists, ranchers, and professionals. This diversity ensured that the
organization was broadly representative. It now has more than fifteen thousand
members, who together control the employment of more than 2 million workers. Its
1 9 Arriola (1988).
2 H Puga (1993), 80.
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stated goals are to promote development, to defend the legitimate interests of its
members, and to harmonize relations between employers and employees.2 1
The Entrepreneurial Coordinating Counsel (CCE) is an umbrella organization
created in 1975 as a response to various political events, especially the reformist
policies of the Echeverria administration, which the representatives of all business
organizations considered a threat to their security and stability. The CCE is formed by
the main business organizations with the exception of CANACINTRA, which is
formally represented through CONCAMIN.2 2
The Mexican Council of Businessmen (CMHN) is an elite group formed in
1962 by the most powerful businessmen in the country. Its approximately thirty
members have a great deal of access to the office of the President and hence influence
the economic decisions. The most prominent bankers, industrialists and retailers
belong to this organization. Except for the CMHN, major entrepreneurial families do
not play a direct role in interest-group leadership. Only 35% of these families have any
representation in other organizations, but they still dominate the organizations to
which they belong. This organization was more closely linked with the bankers’ group
due to the interests of its members. The CMHN controls the CCE due the
overwhelming economic power of its members. In reality, private sector power lies
with the members of the CMHN.2 3 Table II.2 shows the membership of the CMNH
from its foundation to 1983, just after the bank nationalization.
2 1 Bravo. In Maxfield and Anzaldua eds. (1987).
22 Arriola (1988).
2 3 Camp (1989), 152 and 167.
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Table II.2 Mexican Council of Businessmen (CMHN) 1962-1983
Members Tenure
Arango Arias, Jeronimo 1962-1983
Aranguren Castiello, Igancio -1983
Azcarraga Tamayo, Gaston 1962-1983
Bailleres, Alberto 1962-1983
Balsa, Cesar 1962-
Ballesteros Ibarra, Cresencio 1962-1983
Cortina Portilla, Juan 1962-1983
De Iturbide, Anibal 1962-
Escandon, Eustaquio 1962-
Espinosa Yglesias, Manuel 1962-
Fernandez, Justo F. 1962-1983
Garciarce Ramirez, Abelardo 1962-1983
Graza Laguera, Eugenio 1962-1983
Garza de la Mora, Santiago -1983
Garza Sada, Bernardo -1983
Garza Sada, Camilo 1962-
Larrea, Jorge 1962-1983
Legorreta, Agustin F. 1962-1983
Longoria, Octaviano L. 1962-
Lopez, Isidro 1962-1983
Ixtpez, Prudencio 1962-1983
O ’farril, Romulo 1962-1983
Pigliali, Bruno 1962-1983
Quintana Arrioja, Bernardo 1962-1983
Represas, Jose 1962-1983
Robles Levi, Ernesto 1962-
Rojas Guadarrama, Enrique 1962-1983
Ruiz Galindo, Antonio 1962-1983
Sanchez Navarro, Juan 1962-1983
Senderos, Manuel 1962-1983
Valenzuela Valenzuela, Arcadio 1962-1983
Vallina, Eloy 1962-1983
Vega Iniguez, Rolando 1962-1983
Source: Camp (1989).
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41
Businessmen were traditionally required by law to join the business
organization of their sector, although this changed in the 1990’s. Previously,
entrepreneurs were divided into several different organizations so that their political
power would be limited. The government promoted the organization of CONCAMIN,
CONCANACO and CANACINTRA, but COPARMEX emerged from a faction of the
business sector that was displeased with government actions. This is a key difference,
as it explains the more relevant role that COPARMEX has played on opposing
government policies.
iv. Small Capital
a. Origins
In Mexico the private sector is divided into big businesses or conglomerates
that are very powerful politically and economically. However, the great majority of
businesses are of small and medium size. About 50% of manufacturing production and
employment is accounted for by some 125,000 firms which have been categorized by
the Mexican government according to size as micro (1-15 employees), small (16-100)
or medium (101-250).2 4 I will refer to the latter as the small capital group. The small
capital group is large, very disperse, much less powerful than big capital. Small capital
is mainly concentrated in urban areas around Guadalajara, Monterrey, Puebla, Leon
and the northern states, and includes numerous firms from very diverse industries.
Many are family businesses and most of their management functions are controlled by
2 4 Pastor and W ise (1997), 345.
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42
family members. The enterprises in the small capital group are relatively new,
generally founded after 1950. Medium and small businesses greatly benefited from
protectionist measures under import substitution industrialization (ISI) and contracts
with the government.2 5 As John Bailey explains, with the exception of the
businessmen of Monterrey and Puebla, which have their origins in the Porfirian-era,
the Mexican SME sector was invented by the government in the post-war period to
become the engine of growth in a mixed economy.2 6
b. Ideology
In a mixed economy like Mexico’s, the nature of state-business relations are
crucial to the economic development process. In Mexico’s case, the state frequently
did not see the private sector as an ally. The government worked to keep both the
masses and the private sector divided so that it could operate from a position of
political strength in settling conflicts and imposing its own vision on society.2 7 As a
result, small and medium entrepreneurs often did not believe the government was
capable of providing long term economic stability and therefore investments were
adversely affected.
In general, the entrepreneurs in this group resemble the traditional image of the
entrepreneur of the early days of capitalism. Their ideology was based on savings,
prudence in their use of resources and a protectionist philosophy, which made them a
2 5 Puga (1993), 43.
2 6 Bailey (1988), 122.
2 7 Camp (1989).
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firm opposition group when the government was thinking of joining the GATT. Their
economic enterprises were characterized by uncertainty and were much more
vulnerable to the ups and downs of the economy. Their firms were severely affected
by periodic crises, which inflicted credit restrictions, inflation, currency devaluations,
and disproportionate drops in sales. In many cases, the whole family compromises of
its labor and savings for small business endeavors, so survival under such conditions
required a great deal of tenacity. Their small fixed investments were always a
constraint to the acquisition of technology in their industries, leaving them a few steps
behind their big capital competitors.2 8
c. Organizations that Represent Small Capital
The small capital group usually tries to voice its policy requests and criticism
through the sectorial organizations, since individually they are very weak and do not
have direct access to policy makers in the government. Overall, small capital has not
had the cohesion that a smaller group like the bankers showed before to the bank
nationalization. Different organizations represent different sectors and try to present a
united front to lobby before the government. There have been times when these
business organizations teamed up to criticize government policies. The big capital
group is closely related to some of these organizations and, as explained above, most
of the time controls them, making the small capital group a marginal contributor to
2 S Puga (1993), 43.
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their demands, even though there are differences between the two groups with respect
to economic policy preferences.
The main sectoral organization, grouping most of the small and medium sized
manufacturers, is the National Chamber for the Industry of Transformation
(CANACINTRA). CANACINTRA was formed in 1941 and is affiliated with
CONCAMIN. Internal divisions at various points in its history have diminished its
power. This organization is generally very loyal to the government and often acts as its
supporter. It is well known that CANACINTRA was always a close ally of the PRI
and that often its presidents are offered important government positions after serving
29
their terms at the organization.
Cohesion among small businessmen is generally limited due to their different
interests and what they have at stake in each particular situation. Many times the
benefits of a particular policy fall directly on one specific industry or sector, but can
negatively affect other industries or sectors. As the government has a broad set of
economic policies at its disposal, the range of consequences of those decisions can
spread widely throughout the business community. For example, trade liberalization
was strongly supported by a powerful group of exporters who sought to expand their
markets, while smaller firms who produced for the internal market and had prospered
under a protectionist trade regime saw the economic opening as a direct threat to their
interests. However, when general private sector interests, such as private property or
capital controls, are threatened, they tend to act as a class. This was shown with the
2 9 Story (1986), 116.
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bank nationalization, as business organizations around the country protested the
measure and threatened with strikes, led by businessmen in Puebla and the north. But
in the end, when it was time to really fight against the government for its abuse of
power and its direct attack on private property, the business sector failed to display the
cohesion that the situation required as all of the various parties had very different
things to lose in the process.
In the final count, the interests of Mexican businessmen vary depending on
their size or sector. The small capital group has been contradictory in terms of what it
expects from the government. At certain times, they have requested state intervention
in the forms of subsidies, protection, labor control, tax exemptions, credits and
investment. At other times, they have criticized state intervention, arguing for a
laissez-faire economy, and a smaller government apparatus. Different businessmen
within the small capital group have also shifted from one side to the other in making
such requests. What it is clear is that every group depends in some fundamental way
on the government and with few exceptions (e.g. businessmen from Puebla and
Monterrey) have dared to defy it for a prolonged period of time.
v. Labor and Peasants
a. Origins
After the revolution, the stronger and more independent sectors of the working
class (railroad, mining, petroleum, and electric power workers) were in a position to
obtain better conditions than other workers. They remained independent from major
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46
confederations and had been successful in resisting integration to the then dominant
and government controlled labor union, CROM.3 0
In 1931, the Federal Labor Law granted concessions to these workers who
were pressing for better conditions. But this law also laid the basis for the control of
labor, as the state kept the right to declare strikes legal or nonexistent and to recognize
or ignore the elections and directorates of all labor unions. Nevertheless, there were
some gains for labor during the pivotal administration of Lazaro Cardenas (1934-
1940). In his 1934 presidential campaign, Cardenas made it clear that the state was
ready to respond positively to the mobilization of peasants and workers. On a number
of occasions he exhorted the workers to forget their differences and form a united
front.3 1 President Cardenas needed to find additional support to carry out a program of
social reform and economic recovery without intervention from the political
opposition, and this led him to back the main organizing force behind labor unrest, the
CGOCM. Cardenas recognized labor’s right to strike and by supporting the
development of the CGOCM extended the alliance between government and labor that
had begun during the administrations of Obregon (1920-1924) and Calles (1924-
1928).3 2
Cardenas organized labor, peasants, new industrialists, some political leaders
and government officials and the ‘popular sectors’.3 3 Some authors have described this
30 Hamilton (1982), 111.
3 1 Ibid., 123.
32 Cockcroft (1983), 127.
3 3 Popular sectors refer to government workers, bank employees and teachers.
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as the “Cardenas coalition”.3 4 He also accelerated land distribution to rural
communities in the form of ‘ejidos’ via the agrarian reform, and provided credit to the
• • • 35
new ejidatarios through the creation of the Ejidal Bank.
Cardenas encouraged the mobilization and organization of labor to support his
presidency and his pro-labor policies against the conservative wing of the PMR
(which later became the Institutional Revolutionary Party, PRI) and business groups,
but was careful to ensure that the CTM did not become an independent political force.
Although the CTM is recognized as the major labor organization, it incorporates only
a part of the workforce. When Cardenas realized that the CTM might become too
powerful, he created separate labor unions for civil servants, bank employees, and
teachers.
Government workers were also organized, but Cardenas opposed their
incorporation into the CTM, so they were organized in independent unions. Even
though state workers were not part of the CTM, they proved to be one of the most
powerful groups within the labor movement, but they have also been subject to co
optation and coercion. In a similar way, Cardenas organized peasants into a national
confederation partly created to counterbalance the political power of labor. The
National Peasant Confederation (CNC) was created in 1938 when members of thirty-
seven state agrarian leagues got together in Mexico City under Cardenas’ support.
Some peasant unions like the sugar, cotton and henequen industries were strongly
encouraged to leave the CTM and join the newly formed CNC. It is unclear to what
3 4 Maxfield (1990), 34.
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extent peasants and rural workers attempted to resist government efforts to control the
peasant organization. Peasants suffered years of persecution and neglect by the
government and were used opportunistically by politicians for their own interests.3 6
b. Organizations that Represent Labor and Peasants
Post-revolutionary governments were pressured by workers to institutionalize
opportunities for labor participation. In response to this, and recognizing the need to
solve many problems that mounted around workers, the government decided to create
separate ministries to negotiate contract disputes and other differences between labor
and industrialists, and to coordinate social welfare programs. The most important
among these were the Department of Labor (1911), the Ministry of Industry,
Commerce, and Labor (1917), the Autonomous Department of Labor (1932), and the
Ministry of Labor and Social Welfare (1940). In the constitution, article 123 set the
basis for the creation of boards to conciliate and arbitrate the increasing conflicts
between workers and employers. This was finally completed in 1927 with the
establishment of a federal board for conciliation and arbitration.3 7
In 1936, the CGOCM, now the CTM became the officially recognized national
labor movement with Cardenas’ support. Its original leader was Vicente Lombardo
Toledano, who was replaced in 1941 by Fidel Velazquez, who remained in control
until his death in 1997. Velazquez typified the official anti-left union leadership,
3 5 Hamilton (1982), 136.
36 Hamilton (1982), 174.
3 7 Middlebrook (1991), 4.
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increasingly dependent on state favors and social divisiveness. He demonstrated his
preference for conciliation with employers and avoided confrontation with the state
and the private sector. He did more than any other single individual to keep Mexican
workers in a position of subordination to the Mexican government, the PRI and the
38
business sector. Cardenas’ support was decisive for the emergence of the CTM as
the leading labor union. The CTM elevated labor’s presence to a new national level
and effectively dismantled other unions and different ideologies among workers in the
39
country.
Overt time, the leading labor organization, the CTM, hindered national
industrial unions’ organizational autonomy. The creation of the Labor Congress (CT)
in 1966 organized labor in a single umbrella organization under the PRI’s supervision.
It hosted the major labor unions, including some independent ones. The CT came
about as a result of the defeat of the railroad workers movement, and represented the
CTM’s increasing dominance over workers. The differences between labor
organizations continued, and the battle for representation by different unions in
political positions continued. The CT succeeded in being the channel for organized
labor’s demands.4 0
The major peasant organization is the Confederacion Nacional Campesina
(CNC), which was incorporated into the official party in 1937, reinforcing the political
control that the state exerted over it. Its leadership, which includes representatives of
3 8 See Cockcroft (1983) and Granados (1996).
3 9 Middlebrook (1991), 6.
4 ,1 Ibid.
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ejidos, rural unions, peasant organizations, and small landowners, often suffered
changes at the beginning of the sexenio, leaving it vulnerable to presidential
manipulation during the era of PRI hegemony.
Geography has played a role in the process of unionization and confrontation
that labor and peasants have undergone vis-a-vis the state and the private sector.
Largely rural states such as Veracruz, Morelos, Oaxaca, Puebla, Guerrero and
Michoacan have displayed a higher degree of conflict and militancy. Moreover,
industries like mining, textiles, and sugar have been more prone to strikes and defiance
from these groups.
c. Ideology
The labor and peasant movements have been linked to a leftist political
ideology in Mexico. Even though the left has endured repression and co-optation, it
has maintained a strong presence among workers and peasants. These two groups have
continuously fought for the original ideals of the revolution. The left has drawn on
anarchist and syndicalist traditions and includes different currents like revolutionary
nationalism, anti-imperialism, some Marxist groups like the Mexican Communist
Party (PCM), the United Mexican Socialist Party (PSUM), and assorted socialist
movements like the one led by Vicente Lombardo Toledano which led to the
formation of the Socialist Popular Party (PPS). In recent years the Workers Party (PT)
and the Party of the Democratic Revolution (PRD) have been identified with the left
and with the labor movement, but also to peasants in some areas of the country. Many
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51
times the PRI permitted the existence and even supported some of these groups, in
what was called the official or loyal left.4 1 After the PRI’s tenure in power came to an
end in the year 2000, the left headed by the PRD has regained strength and scored
some decisive victories in some states and Mexico City.
In the past, labor and peasants have also been supported by state managers that
shared their ideas. The ‘national populists’ or ‘structuralists’, who favored industrial
protection, extensive state intervention, subordination of monetary stability to the goal
of industrial development, wage increases and the modernization of agriculture, had
close ties with these groups.
For the most part, peasants have been excluded from the economic decision
making process. The development strategies that the state undertook from the 1960’s
on have diminished the role that peasants play in the economy. All this has made the
peasants a marginal player in the ideological battle for the direction of the country’s
development path.
d. Peasant-Labor Relations with the State
The institutional base of the Cardenas coalition lay in the corporatist
organizations representing peasants and labor within the official party, the
Confederation of Mexican Workers and the National Peasants Confederation, the
state-created business organization CANACINTRA, as well as the ministries of
Agrarian Reform, Agriculture and Hydraulic Resources, Communications and
4 1 Carr. In Middlebrook ed. (1991), 121.
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Transport, Health and Public Welfare, Labor, and Public Works and Housing
(abolished in 1976). In the financial sector they were backed by development banks
such as NAFINSA, the Banco Nacional de Credito Agricola, and the Banco Ejidal, but
could not rival the power of the Finance Ministry and the Central Bank in most
administrations.
This loose coalition has indelibly shaped Mexican politics, although its
influence has varied and it has sometimes lacked the power to influence the decision
making process. Workers, peasants and the popular sectors were incorporated into the
structure of the party, the PRM (Mexican Revolutionary Party) in a way that strongly
encouraged them to ratify party actions, while their leaders would represent their
interests before the party’s leadership.4 2 Over the years the Mexican government
developed a mechanism to control labor and peasants. Very often leaders have
betrayed the interests they represented, becoming immersed in the political game or
being co-opted by party leaders. Leaders of the CTM and the CNC lined up with the
official political party not only to obtain political benefits or influence, but also
because they recognized that the party controlled the state and was a very important
source of whatever economic benefits were to be granted to either leaders or workers
i 43
and peasants.
Labor was a key component of PRI’s hegemony in the post-war period,
providing the party with a substantial political clientele (second only to the peasants).
The relative absence of official labor union problems was an important factor in the
42 Maxfield (1990), 35.
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impressive economic growth that Mexico posted from 1950-1980. This labor
abstinence can be explained by the relative lack of response of oligarchic union
leaders to the workers they allegedly represented.4 4
Labor and peasants have been in favor of state intervention for the allocation of
capital, since these groups argued that there has been a gap between savings and the
resources necessary to finance development. They have favored exchange rate
controls and sought a structuralist economic program that prescribed high public
spending despite inflationary pressures and heavy state involvement in mobilizing
investment capital.4 5
As Solis describes, the labor unions of state enterprises formed the core of the
labor sector of the PRI and systematically offered support to the government. Their
leaders took the biggest share of the Party’s tickets for Congress, the Senate, and state
legislatures. The PRI generally pays attention to labor’s recommendations, but many
times they are never carried out as they differ with party interests.4 6 This was more
obvious during the de la Madrid administration, when the government turned a deaf
ear to labor demands and let the burden of economic adjustment fall on the shoulders
of workers.
Through the years, different labor movements outside the CTM, like the
electricians union, the railroad workers, and the UNAM workers union, have gained
power and successfully pressured the government to comply with their demands.
4 3 Cockcroft (1983), 154.
44 Roxborough. In Philip (1988), 111-112.
4 5 Maxfield (1990), 82.
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Krauze explains that the first axiom of the system was dependency, above all that of
the workers for whose benefit, supposedly, the advances in labor legislation had been
instituted. The system always tried to control independent unions and sometimes harsh
attacks were launched to subjugate them.4 7
The railroad workers movement of the late 1950’s is a good example of this.
This group started to behave with a lot of confidence, criticized publicly some of the
administration’s policies, proposed the creation of a council with broad worker
participation, and issued briefings about the oil industry. A wave of labor solidarity
then started in other unions, and this threatened the hegemony of the CTM. Fidel
Velazquez constantly denigrated these labor activists as ‘red communists’, but this did
not prevent unions from showing their support for the railroad workers. The state used
all of its power to put an abrupt end to the movement, and did so through massive
arrests of workers and the imprisonment of strike leaders.4 8 Other unions like the
electricians, the teachers and bus drivers have attempted to pressure the government,
through massive strikes, marches in Mexico City, the closing of roads, and
demonstrations in front of the National Palace. In some cases these unions achieved
gains, but generally the state has acted with force to dissolve them.
After 1968, the Echeverria administration tried to better incorporate dissident
groups of labor and the middle classes. He used populist rhetoric that emphasized
social justice, offered wage increases, price controls on basic commodities, credit in
46 Solis (1981), 100.
47 Krauze (1997), 632.
4 8 Ibid., 637.
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rural areas and public investment. The mix of policies adopted was anointed as his
‘shared development’ project.
During the Echeverria administration, workers and peasants gained the favor of
the president, and were actively supported by the Minister of National Patrimony,
Flores de la Pena, who was very influential in the administration. At the time, the
Finance Ministry waned in importance as the president controlled economic decisions
from Los Pinos and the Ministry of the Presidency. The Echeverria administration
increased the state’s involvement in the peasantry’s land and wage struggles in an
attempt to divide or co-opt them. In 1975 the Pacto de Ocampo was launched,
bringing together under the control of the CNC independent unions such as CCI, the
CAM, and the UGOCM in order to support its modest land distribution program.4 9
The Lopez Portillo administration did not continue the Pacto de Ocampo, but
most of the peasant organizations remained loyal to the system. Which is to say, the
tradition of hegemony by the ruling party continued. The 1979 oil price boom helped
the administration to contain dissidence and support was sustained by constant
negotiations with labor and peasants, granting economic benefits and concessions.
When economic crisis erupted in 1981 and Lopez Portillo chose Miguel de la Madrid
as his successor, a decision not welcomed by the labor sector. Fidel Velazquez made
the uncharacteristic move of establishing certain conditions in order for labor to
support the PRI candidate. The bank nationalization was one of these conditions, as
this calmed labor down and enabled it to briefly regain political clout.
49 Cockcroft (1983), 247.
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The first move of de la Madrid was to sign an agreement with the IMF,
committing the administration to follow a monetarist package and reduce the
government’s fiscal deficit. The adoption of orthodox and austere policies and the
government’s retreat from economic nationalism, inflicted severe economic hardship
on the labor and peasant sectors. Real wages declined sharply, many workers lost their
jobs due to the recession, and unemployment surged to previously unthinkable levels.
Workers turned to the underground economy in order to subsist and in many cases
split their time between more than one job. What is surprising is that the government
managed to work out yet another understanding with these sectors, in the form of a
1987 “Economic Solidarity Pact”, when this level of hardship had only been imposed
elsewhere by military regimes.5 0
vi. The Mexican State
a. Authoritarian but Flexible
The Mexican state has its origins in the years after the revolution. The
revolution changed much of what had been the Mexican state up to 1910 and set the
bases for a new form of state with the Constitution of 1917. The process of state-
making was consolidated by President Cardenas in the period from 1934 to 1940 and
the outcome was a dominant single-party regime. A ‘revolutionary coalition’ of
50 Collier (1992), 76.
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organized labor and peasantry was institutionalized within this inclusionary party
regime.5 1
Many social scientists agree that Mexico was a predominantly authoritarian
system up to the year 2000. In that system, a centralized executive together with the
‘official’ ruling party controlled and manipulated the interest groups, the party system,
and elections.5 2 Some described Mexico’s system as political authoritarianism,
implying that the power to make decisions was in the hands of a few leaders, which
were selected or approved by the executive, that the state controlled social groups, and
that political participation was limited.5 3 This description of the Mexican state is partly
accurate because it is true that the executive had enormous power, but it also needed a
base of support like all politicians and hence there was a need to comply with the
demands of those interest groups that formed this support base. The Mexican state has
not been a hard-line authoritarian state because it is often flexible in its response to
different groups and because it has allowed for substantial change in its leadership. On
the other hand, the Mexican state did behave in an authoritarian form in many
different ways, i.e. the presidential succession rule, where the incumbent president
chose his successor in what was called the ‘dedazo’. This impeded the democratic
participation of the general public and also other political parties. The PRI had a
monopoly in the law-making process that was very convenient to its interests and
detrimental to the rest of society.
5 1 Collier (1992), 7.
52 Story (1986), 79.
5 3 Camp (1989).
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Kaufman indicates that the corporate model5 4 appropriately describes the
Mexican state prior to the 2000 democratic transition;5 5 Collier and Collier further
argue that most of the important social actors like small entrepreneurs, labor, peasants,
and bureaucrats, belonged to state-initiated associations over whose governance,
demands and even leadership, the state exerted control.5 6 The problem with this view
is that the most important entrepreneurs have created their own unions independent
from the state and many times have posed stiff opposition to the government’s
projects. In the last years of the period under study many of the groups that were part
of the corporate system of the official party looked for other alternatives and even
withdrew their support from the official party. Story argues that certain corporate
characteristics seem valid, but on the whole the Mexican private sector does not
readily fit the corporatist paradigm.5 7 He stresses that the most powerful groups in the
country are those industrialists who represent the big ‘grupos’ and that the state varied
its approach towards them during each sexenio. He explains that the state and these
groups have a mutual interest in maintaining a capitalist development strategy in
Mexico.
Some describe the Mexican state as having considerable autonomy from
certain groups and a political process characterized by bargaining among elite groups
with interests that differ from its own. Hamilton on the other hand, argues that the
54 The corporate model is a subcategory o f the authoritarian description, the concept that the basic unit
o f politics is the corporate (usually occupational) group, not the individual.
5 5 Kaufman (1975), 5.
56 Collier and Collier (1979).
57 Story (1986), 79-105.
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Mexican state has limited autonomy. She contends that a state demonstrates autonomy
when it pursues goals different from those of the dominant social actors, when its
decisions cannot be attributed to the direct or indirect influence or intervention of a
dominant social actor, or when dominant social actors cannot prevent the state from
acting against their own interests.5 8 It seems that in Mexico during the period of my
study, all of these factors held in one way or another. The state pursued goals that
were not attributable to pressure from interest groups outside the state, i.e.
bureaucratic self-preservation. It made decisions independently from pressure groups,
i.e. the change of approach to economic policy-making in the eighties. At the same
time, the state undertook policies that were against the groups that are considered
powerful, i.e. the bank nationalization. This was possible, because they had already
used their most powerful threat, capital flight, in the early 1980’s to block certain
policies. So in certain situations the state has been able to act against the interest of the
most powerful groups in the country. But pressure groups also check the state decision
making process and their credible threats (i.e. capital flight, investment, strikes) do
prevent the state from acting without their consent. Most of the actions that the state
took during the period from 1970-1988 were influenced by the groups analyzed in this
study.
In the period under study the Mexican state went through a process of change.
It started with a semi-authoritarian state whose power was based on the support of
certain groups and therefore provided specific benefits for them. This authoritarian
ss Hamilton (1982).
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tradition was contested by different groups of society who felt that the state was not
providing the benefits that they expected in exchange for their support. People were
increasingly displeased with the state as they had come to know it. The autonomy that
the state showed decreased over time, as the state gradually lost some of its
constituency and some of these groups acquired enough power to challenge and
confront the state. This was the case for most of the period of 1970-1988. At the end
of this period the state showed diminished power, although it still managed to
undertake unpopular economic measures without major social unrest.
b. Structure
John Womack has commented that:
The Mexican Revolution had without a doubt an important political
achievement: it substituted a mortal man, Porfirio Diaz, with a perenne
institution, the PRI. Don Porfirio was sort of a PRI of its time. The ones who
triumphed in the revolution were the political entrepreneurs, the little brothers
of the great capitalists from the north; the ones who lost were the peasants, the
Mexican people.5 9
One may agree or disagree with Womack, but the fact is that with the
Revolution, Mexico went from the control of a dominant political figure to that of a
dominant political party. The main difference was that the ideals of the Revolution
were embedded in the constitution and revolutionary leaders not only followed it, but
continued their revolutionary project. The outcome was that the labor and peasant
sectors were included in the formation of the new state, their support being of outmost
importance to the success of the regime. At least in the beginning this was true. With
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61
time, the revolutionary ideas eroded within the system and other groups became the
main beneficiaries of state policies.
In the 1917 constitution the Mexican state is divided into three main powers:
the executive, legislative and judicial branches. The executive is led by the president
and includes all of the state ministries and the executive cabinet. The executive in
Mexico exerted enormous power over the other two branches of the state and played a
definitive role in the economic and political life of the country. The legislative branch
of the state consists of the chamber of senators and the chamber of deputies, which are
intended to represent the voices of the general public. The judicial branch is headed by
the Supreme Court and includes the different police forces of the country.
The constitutional arrangement established by Cardenas is basically the same
that was still in place throughout this study. When Cardenas reached power, he sought
to strengthen the presidency, as he did not want to be manipulated by his enemies. In
terms of state-building Cardenas strengthened institutions, mainly the presidency and
the ruling party, and he diminished the role of caudillos and the army.6 0 Cardenas
institutionalized the presidency, concentrating power here and setting the executive
term for a six year period or ‘sexenio’. The result was that an omniscient president
ruled the country with the help of five institutional groups: the official political party,
the congress, the executive, the judiciary and the state-owned enterprises. Within this
mechanism, the official party (PRI) was essential to political stability, as all the above
59 Proceso 472, Novembe, 18 1985.
6 ( 1 Collier (1992), 23-26.
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mentioned groups belonged and owed their existence to the PRI. The party mirrored
the ideologies of the labor and peasant sectors and of the state bureaucracy.6 1
Bailey, argues that at the institutional level, Mexico is basically a presidential
system, one based on strong party-bureaucracy arrangements within the context of a
series of pacts between social classes and groups. There is a word that for many
describes the Mexican system: ‘Presidentialism’. For supporters of the system and the
status quo, presidentialism meant arrangements appropriate to Mexico’s reality: a
strong centralizing institution, personified in a figure who can preserve order amid
conflict and underdevelopment while advancing the revolutionary projects. Critics on
both the right and the left saw presidentialism as the core institutional flaw of a system
that permitted no checks on the personal power of the incumbent and which by its
logic opposed democratizing forces.6 2 Echeverria and Lopez Portillo are good
examples of this system, as they accumulated an enormous amount of decision making
power within the presidency. Until 2000, most Mexican presidents have used this
power to pursue their own interests, to favor certain groups that supported them or to
destroy uneasy opposition and uprisings.
Historian Fernando Benitez once commented that, “Mexican presidents
apparently listen with a lot of attention, but they do not care about what you are
saying. I believe that politicians do not care at all about the criticisms that some
publications make. They only care about the radio and television that are completely
6 1 Basanez (1990).
62 Bailey (1988).
6 3 See Zaid (1987).
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under their control.”6 4 This is a good way to describe how the presidential system
behaved when it faced criticism and in general to the demands of its constituents.
Though every president brings a distinctive style to the office, each must
resolve common challenges. As the PRI’s nominee a presidential candidate must still
mount a credible campaign; once in office, he must consolidate power and break from
his predecessor; then he has only a brief period to implement policies; and finally, he
must manage a stable political succession. Within the sexenio, the period of
consolidation is when the President installs his team, removes potential opponents and
begins to implement programs. This might occupy the first year and a half of his term.
The phase, during which the President reaches the peak of his power, lasts two to three
years and in this period the major projects of the sexenio are implemented. The
succession process takes the last two years, as described by Bailey.6 5
At the same time there are certain pressure groups that place limits on the
presidential system. The threat of capital flight exerted by business groups is a real
check on the decisions that the president may make. Even though labor is loyal to the
system its negotiating power has varied during the period under study, and in the last
years of the period decreased considerably.
Within the executive, there are ministries that have more power to determine
the economic policies that the president will adopt. The Finance Ministry (SHCP) is at
the top of this list, although its importance varied along the three sexenios as other
ministries challenged its authority to control the revenues and expenditures of the
6 4 Proceso 469, October 28 1985, 26.
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country. The creation of the Ministry of Budget and Planning (SPP) by Lopez Portillo
was a big hit to this ministry’s power. The Ministry of National Patrimony
(SEPANAL) was very influential during the first two sexenios under consideration, as
it had strong ties with the president and was frequently able to contradict the policies
sought by SHCP.
In Mexico, the public sector has always played an important role in the
economy and this tendency grew during most of the post-revolutionary period. The
state’s first big addition was the nationalization of the oil industry by Cardenas and the
subsequent formation of the state-owned oil monopoly PEMEX. In the 1950’s the
electricity industry became part of the state. But it was during the external borrowing
spree of 1970’s that state expansion spun out of control. During the period from 1971
to 1982, 883 firms from various sectors were incorporated into the public sector,
reaching an all-time high of 1,155 firms by 1982. This accounted for almost 20% of
GDP and represented more than 10% of the total employment of the country.6 6 After
this peak, and under pressure from the 1982 debt shocks, the expansionary strategy of
the state changed and since then the public sector has been reduced constantly.
c. The State’s Relation with the Dominant Party
In early post-revolutionary period Calles founded the Partido Nacional
Revolucionario (PNR), a political party that would help him achieve his personal
objectives. He failed to institutionalize the populist coalition that supported him, since
6 5 Bailey (1989).
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his party (PNR) did not incorporate organized labor. Rather, it was Cardenas who
incorporated labor into the party coalition and reorganized the PNR into the Partido de
la Revolucion Mexicana (PRM) in 1938, thus bringing the popular sectors into the
ruling party coalition. In the last year of his tenure as president, changes within both
the PRM and the electoral system were made to strengthen single-party dominance.
These changes were aimed at decreasing the role of the party and subordinating it to
the state, imposing greater discipline within the party, and reducing the power of the
different sectors within the party, especially labor. This reorganization was completed
when the PRM was transformed into the Partido Revolucionario Institucional (PRI).
This was very important to the further control of politics and PRI domination of
Mexico.6 7
The importance of controlling organizations like the PRI, labor, peasant and
small business organizations explains part of the centralized bias of the Mexican
political system. Party and government officials preferred to delegate control to the
leaders of these groups themselves. The resources needed by these group leaders were
provided by the state sector. The government used many different methods to avoid
losing its grip on these organizations. Co-optation and attack were frequently used,
destruction of the political career of an opposition leader was common; if there was no
other option, the government did not hesitate to use disappearance or assassination. It
also had at its disposal a wide range of legal or quasi-legal options to deal with
uncomfortable opposition. The control it exercised over the press and courts, the
6 6 Aspe (1993), 181.
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resources it had at its disposal and the absence of any alternatives often left dissidents
powerless.6 8 The structure and balance of power of state institutions exerts a direct
effect on policy and on the formation of coalitions. Political interests and the
institutional affiliation of different actors within the state helped determine their policy
preferences and coalition-building patterns.6 9
Peasants represented by the Confederacion Nacional Campesina (CNC) have
traditionally been the least favored group. This can be explained by their lack of
political power, their lack of cohesion as a group, and the personal interests of their
leaders. Their weakness, along with a diminishing peasant population, meant that this
group benefited least from state fiscal policy.
A fact frequently forgotten is that no other group can be as detrimental to a
policy as the bureaucracy itself. Regarding fiscal policy, the bureaucracy is especially
strong on the spending side. The bureaucracy looks out for its own interests, regardless
of the official agencies in which it operates. The state bureaucracy in Mexico seems to
have limited power and to be an ally of the executive for the most part. There are state
worker groups that have shown more opposition to government decisions and have
pushed harder for their demands than other groups. The state teachers’ union and the
oil workers union are two good examples of strong militancy and independence, the
latter being the one that has been more successful in exerting pressure to the
government.
67 Collier (1992), 20-34.
68 Bailey (1988).
w Thacker (2000).
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Thacker argues that policy makers are more likely to form coalitions with
those private groups whose structural leverage is greatest and whose pressure
strategies are most effective. State policy makers exert direct influence on the process
of policy making, and the participation of different factions within the state in
competing policy coalitions is crucial to their relative strength and success. The
vulnerability of the state to pressures exerted by societal groups affects the way in
which it forms alliances with those actors. This vulnerability can be structural or
electoral. Structurally, state leaders rely to varying degrees on mobile private
investment as they seek to maintain power through the promotion of economic growth
and employment. Electoral pressures and party competition can also threaten the
position of established state leaders. The vulnerability of state leaders to these
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pressures influences the manner in which they build political alliances,
d. Ideology
The PRI does not have a core ideology. The PRI has been described as not
getting involved with economic planning, but focusing in electoral organization and
mass mobilization. Presidents in Mexico have showed very diverse political and
economic inclinations, and they modify the government and even the structure of the
country accordingly, but these changes do not last, as the next president will impose
its own. Political leaders in Mexico test the system, push the limits of action, and act
where there is least resistance. It is a trial and error phenomenon. Movement is
7 ,1 Thacker (2000).
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possible where there are no pressure groups that can resist or retaliate. Such a pattern
of action has been pursued skillfully, and in its way remains a stable process. Groups
within the government cluster around ideological lines. They can share objectives, but
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also follow paths that diverge ideologically and thus result in conflict.
The political class has been divided into two groups, technocrats and
politicians, since the Aleman administration, as this is when technical competence
became an important asset for a successful career inside the system. After that sexenio,
and until the early 1970’s, both groups seemed to accept their roles in policymaking.
When Echverria came to power a greater division and some ideological differences
became more notable.
The ‘tecnicos’ or ‘technocrats’ of the seventies were defined by their
credentials and employment rank. The certificate of expertise, as Smith explains, was
a university degree, before from the public university UNAM and more recently from
private elite universities. Increasingly, a tecnico came to require a post-graduate
degree, often from a foreign elite institution. Whereas intellectuals tend to present
opinions and viewpoints on public matters of general interest, technocrats claim to be
in command of special skills for the resolution of particular policy issues. Imbued with
the prestige and authority of ‘scientific’ knowledge, they appear in various fields:
agronomy, engineering, and, most recently and emphatically, economics. Often they
may not have held elected office. They may differ in outlook and opinion among
themselves, take different sides of arguments, but they have one thing in common: a
7 1 Solis (1981).
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standard ticket for admission into decision-making circles.7 2 The ‘politicos’ generally
had risen though the ranks of the PRI. They were in general more identified with the
popular classes and used demagogy as their favorite tool to gain supporters. Their
origins were more diverse and often emerged from labor and peasant organizations, or
through the ranks of the system in the interior provinces of the country. While the
technocrats tended to favor the interest of the private sector and bankers’ group and
pursue market-oriented policies, the politicos used the principles of the revolution as
their aid to earn the support of the masses and nationalistic discourse.
As in other countries, bureaucratic elites in Mexico pursue their own interests.
It does not matter where they operate, they adapt their functions to personal or group
interests. As Looney explains:
Their links with their clientele or with that sector of society they are supposed
to regulate lead to a tacit pact of reciprocal support, which more often than not
has meant maintenance of the status quo. It should not be forgotten that a
bureaucracy owes its first loyalty to itself. Administrations come and go,
bureaucrats stay; they work for self-maintenance and survival. Any policies of
reform that may endanger their position, change their routine patterns, or
disturb their relations with their clientele will arouse suspicions, passive or
active resistance, or even antagonism and conflict. The bureaucrats’
participation in the design of plan objectives and their involvement in plan
implementation are thus essential prerequisites for obtaining their cooperation
in any policy of reform.7 3
Echeverria started the process of giving ‘technocrats’ an explicit place in the
administration, as he passed over many qualified system-regulars to promote a
younger generation. Lopez Portillo was more committed to an older administration,
but he relied heavily on ‘technocrats’ too, especially toward the end of his
72 For further detail see Smith. In Camp (1986).
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administration when the debt crisis hit.7 4 With de la Madrid the government finalized
its transition to a technocratic orientation. The economic conditions that the country
was facing tilted the balance in favor of this group.
vii. The PEMEX Coalition
a. Origins
Some authors have defined the PEMEX coalition as the union of these groups
directly related to the oil industry in Mexico. These groups are the oil workers union
(STPRM), the PEMEX managers, and some state mangers directly related to the
industry. PEMEX is important and influential in Mexico because it represents a
symbolic turning point in Mexican history. PEMEX evokes the nationalization of oil
in 1938, one of the most revered events in Mexican history. PEMEX uses the
nationalistic rhetoric of the Mexican Revolution to justify its existence, its policies and
programs, and its efforts to further growth. Many have criticized specific policy
measures and frequently railed against excessive corruption within the organization,
but it enjoyed a certain degree of immunity from public scrutiny that allowed it to go
about its business with less oversight than the more important ministries.7 5
In the period under study, the law recognized PEMEX as a semi-independent
entity and placed it under the governance of the now defunct Ministry of National
Patrimony (SEPANAL) and later under the Ministry of Energy, Mines and Parestatal
7 3 Looney (1985), 93.
7 4 Bailey (1989).
7 5 Williams (1979), 99.
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Industry (SEMIP). These two ministries were limited in their ability to control the oil-
giant and often let it act independently. The law also provided a certain amount of
control for the central government, especially the Mexican president who controlled
appointments to key positions, and the overall budgetary process. As oil became more
important to the Mexican economy, the role of the Minister of Patrimony faded and
the president and the director general emerged as the key policymakers in the
petroleum industry.7 6
The primacy of PEMEX in the national economy is also illustrated by its
contribution to the national treasury in the payment of taxes. PEMEX was by far the
largest single taxpayer, increasingly so during its expansion in the 1970’s and early
1980’s. The enormous proportion of total exports that it represented, reaching over
70% of the country’s total exports in some years, made PEMEX the most important
source of foreign exchange. PEMEX’s participation in total imports of the public
sector went from 18.5% in 1970 to 44.8% by 1980.7 7 By 1977 the budget began to
reflect increasing emphasis on PEMEX. Rich, sophisticated, and powerful
organizations are always politically significant and PEMEX was no exception. Its
existence and growth created opportunities, but also controversies and problems.7 8
Over the time period of this study, PEMEX’s enormous economic power gave its
leaders considerable leverage in economic decisions and a feeling of independence
that made it hard for the central government to control.
7 6 Ibid., 115.
7 7 Teichman (1988), 75.
7 8 Williams (1979), 100.
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PEMEX became more political with the arrival of Diaz Serrano as Director
General in 1976. His predecessor in that position, once wrote, “politics should not
intervene in PEMEX, nor should PEMEX intervene in politics”.7 9 Williams argues
that although some PEMEX officials were deeply involved in the company’s
policymaking and more than ever influenced its administration, PEMEX policy was
dominated by state policy makers. After the oil expropriation of 1938 the company
gradually emerged as an engine of growth and economic development for Mexico. In
the following years state policy makers changed PEMEX’s objectives and it became
the main growth subsidizer of Mexican industrialization, in the 1970’s, providing
energy at very low prices. In those years, Mexican industries paid about one-sixth the
price that PEMEX charged for exported gas and about one-fifth the price of oil
exports.8 0 The great beneficiary of this policy was the private sector. In those years
PEMEX was at the pinnacle of its importance for the government and the country.
After the fall in oil prices and the debt crisis of 1982, the government focused its
attention on debt restructuring and PEMEX provided a huge amount of resources. Its
director at the time, Mario Ramon Beteta, formed part of the old guard of the PRI and
was always cooperative with the de la Madrid administration. His mistake was to
declare open war on the oil workers union (STPRM), creating an uneasy situation
between the company and its workers.
The STPRM was created under the auspices of President Cardenas in 1936, but
its real development came under Joaquin Hernandez Galicia (“La Quina”) who
7 9 Burmudez (1976), 97.
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became leader of the STRPM in 1962. He was a political ally of Lopez Mateos who
had helped him during his presidential campaign, rallying the oil workers behind him.
La Quina’s inspired in many of his followers awe, respect, adulation, loyalty, and fear.
He was seen by the oil workers as the figure to follow and one that would fight for
them, even if at the same time he accumulated a great fortune. After he stepped down
as union leader, he continued to be the person pulling the strings for the union.
A threat of strike in this important sector is such a powerful weapon that the oil
workers enjoy higher wages and benefits than those of any other sector in the country.
The union enjoys impressive financial holdings, thanks to dues from the workers and
generous contributions from PEMEX. A main artifice of this growth in power was La
Quina, as his leadership granted the workers security and political presence in the
national arena. He was kind of a ‘godfather’ to the people, as they asked him for
favors, and he tried to serve all of them in exchange for their unconditional support.
He had a magnetic, arresting personality. He placed his men in important political
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positions throughout the country, so he always had an insider in any matter.
b. PEMEX-State’s Relations
The STPRM gained increasing force during Echeverria’s administration. La
Quina cultivated close ties with Echeverria when the latter served as Interior Minister
in the Diaz Ordaz sexenio. He also was a major supporter of Echeverria’s presidential
campaign. During those years PEMEX director, Reyes Heroles, a lawyer and a fervent
80 Williams (1978), 101.
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nationalist, continuously criticized corrupt union practices, but the president
disregarded the critics. The STPRM was increasingly gaining power as a union at that
time and by the mid 70’s it was unquestionably the most powerful union in the
country.8 2
During the Lopez Portillo administration the PEMEX coalition reached its
peak, as more oil was discovered in the Mexican Gulf and the country became
increasingly dependent on oil exports. Diaz Serrano, a mechanical engineer who was a
private contractor of PEMEX and personal friend of Lopez Portillo was named
PEMEX director in December 1976. He had evaluated the oil reserves and assured
Lopez Portillo that they were greater than the estimate given by the then director,
Dovali Jaime. The STPRM managed a multi-million dollar operation that included a
credit union, a large food and department store, ranches, and commercial buildings.
The STPRM provided considerable benefits to its workers in the form of high wages,
0 -3 t
credit, housing, and medical care and in that way ensured their loyalty. The union
hired most of the workers, leading to ever expanding corruption, with jobs sold
regularly. The deal was that if PEMEX did not contest the STPRM’s many social,
political, and economic prerogatives, there would be no full-scale attack on corruption,
and the unionization of former confidential workers would not be challenged. In
return, the union backed the new director general, Diaz Serrano, to the limit; it also
agreed to the contracting out of work with private firms, as well as a decrease in illegal
8 1 Grayson (1980), 91.
8 2 Ibid., 88.
8 3 Teichman (1988), 71.
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75
practices. This agreement worked perfectly for both parties for the entire Lopez
Portillo sexenio, while oil prices were high and corruption was rampant in the
administration.8 4
Diaz Serrano insisted that oil could be the propeller of the country’s economic
resurgence. This changed the path of PEMEX, as the development of oil became the
top priority of the administration. The company gained enormous independence from
the ministries that controlled it and its influence in economic policy increased
significantly. At the same time the power of Diaz Serrano became more visible and
85
threatening to the politicians and technocrats in the federal government.
Diaz Serrano perfectly understood that in order to make PEMEX the leading
force economically and politically, he had to gain the support of the workers
represented by the powerful STRPM and its leader La Quina. So during his tenure as
the head of PEMEX, relations between the STRPM and Diaz Serrano were
particularly close. At the same time, La Quina had easy access to the president.
PEMEX and the STRPM agreed that 2 to 2.5% of every contract let to an outside firm
would be contributed to the union’s social fund, while the union helped PEMEX by
suppressing dissident workers.8 6 Together Diaz Serrano and La Quina, made the
PEMEX coalition a frightful player in the Mexican system. This interest group quickly
accrued the power to influence fiscal policy and thus received many benefits from it.
8 4 Grayson (1980), 89.
8 5 Ibid., 58.
8 6 Teichman (1988), 71.
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Those factions of the private sector that had a direct relationship with the
industry strongly supported the rapid development of oil. The most powerful Mexican
business groups like HYLSA, ALAFA and CYDSA, all part of the Monterrey group
and the main producers of steel and chemicals in the country, profited greatly from
contracts with PEMEX or the union.8 7
In 1981 and 1982, the practice of using PEMEX as a financial instrument of
the state to obtain loans for the government became more common, especially in the
form of large short term loans. This continued even when it was clear that oil prices
would continue falling. This left PEMEX with an extremely delicate financial
situation, one that compromised future oil exports.
The power that Diaz Serrano and La Quina shared ended when the former was
asked to resign in 1981. La Quina remained in power, but he did not find an ally in
Diaz Serrano’s successor, Beteta. At the beginning of the Salinas administration, La
Quina was ousted from the union and incarcerated, a move that all but finished the
once powerful PEMEX coalition.
Under de la Madrid, who had served as PEMEX’s vice-president of finance
and knew the company well, PEMEX policy suffered a radical change. He started with
the pricing policy, bridging gaps between international and domestic prices. Then the
focus was on adjusting prices to bring demand into agreement with Mexico’s refining
capacity so as to avoid the need for oil imports. Mexico’s entry into the GATT exerted
extra pressure on the government to achieve price adjustments. The administration
87 Teichman (1988), 73.
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77
came up with the National Energy Program of 1984-1988, a document greatly
influenced by the PRI’s technocratic wing, which established that the main energy
goals were to increase productivity, conservation, and the diversification of sources of
energy. These objectives denoted desired policies, but in reality they were never
achieved. The reduction in government investment and the world recession prevented
the successful completion of the program’s goals. De la Madrid also looked to
increase the creation of employment and the development of exports in diverse
industries other than oil.8 8
viii. Relation of Pressure Groups and Sexenios
In the period under study, there have been groups that dominated the political
economy of the country. Under the Echeverria administration, the bankers’ group was
particularly powerful and reaped many benefits during this period. Workers and
peasants were also favored by the populist ideology that dominated this
administration. The big and small business groups other than the bankers, used their
organizations, especially COPARMEX, to constantly attack the government and this
was a sexenio of struggle for them. The PEMEX coalition gained strength basically
through the labor union and was in a position to profit from the benefits that oil
discoveries would provide in the near future. The government was divided between
populist ideologies held by some of the most important people within the
administration, including the president, and a group of technocrats that was gaining
8 8 Randall (1989), 38-39 and 133-134.
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ground in the policy arena. The populists still dominated the decision making and
spending increased in every spending category, but foreign debt increased as well.
During the Lopez Portillo administration, there were some major adjustments
and power shifts. The bankers’ group continued to dominate policy with strong
influence over the government, especially the SHCP and the central bank, they were
joined with the favor of government by the big capitalists of other sectors. But in
1982, they were signaled as the scapegoats of the economic failure of the
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administration. In September of that year Lopez Portillo expedited two decrees , one
which expropriated the banking system and another which established exchange rate
controls. This action by the state divided the big capital group, as its members were
affected in different ways by the decrees. Big capitalists whose businesses were
mainly in banking suffered a terrible blow to their interests. Others whose main
interests were industrial and who were strongly affected by the financial crisis held out
for the help that the government had promised to save their industries. Small business
group, after enjoying the benefits of protectionism for decades, ended with increasing
opposition to state policies in terms of crisis management. The small business group
experienced difficult times with the 1982 crisis and became one of the most vocal
groups at this time. Labor and peasants got plenty of resources through different social
programs and subsidies during the administration, as they had some allies in key
positions in the cabinet. This group supported the government’s decision to nationalize
the banks. PEMEX and its workers gained unprecedented strength and this was their
8 9 Discussed in greater detail in chapter VII.
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79
most influential sexenio, as oil became the motor of the economy. The coalition had
some detractors in the cabinet, but for most of the time had the support from the
president. The economic cabinet was divided and had severe internal discrepancies, as
a battle raged between the national populists and a more fiscally conservative group.
At the end of the sexenio, the national populist group seemed to have gained the upper
hand, as expenditures increased to all time highs, but foreign debt too. When the crisis
exploded, the government blamed the bankers’ group, who were allies of the fiscal
conservatives. Yet this would be the populists’ last victory, as they were the main
promoters of the bank nationalization. The end of the sexenio and the election of de la
Madrid as president meant a political defeat for them and their eventual exit from the
higher spheres of government. At the same time, it meant that the strongest link
between government and labor and peasants was cut.
With the country immersed in its worst crisis since the great depression of the
1930’s, the de la Madrid administration’s policies brought deep changes to the
political economy. The nationalist group of politicians within PRI, who had been
dominant during recent decades, was displaced and relegated to inferior positions
within the administration. A young group of technocrats was placed in every important
position and their goal was to make the Mexican economy more efficient at any cost.
They were primarily concerned with reducing the government’s fiscal deficit along the
lines of the IMF’s suggestions. The new government took away basically all the
support that peasants and workers had received during the past two administrations,
and made them bear the burden of adjustment. The PEMEX coalition ceased to exist,
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as former leader Diaz Serrano became an enemy of the administration. Oil revenues
decreased abruptly as international oil prices continued their downward trend.
The smaller business group was again very critical of the administration, with
the difference that this time there was an economic crisis of enormous scale to cope
with. Another big problem they faced was the administration’s economic opening and
this would prove to be very costly for many of them. The ex-bankers that had business
interests which had not been expropriated retreated to them and tried to weather the
difficult economic times. Many big enterprises received help from the government so
as to deal with their international debt and exchange rate volatility. The rest of the
bankers fought with the administration over the terms of the compensation that they
would receive for their former businesses. Big capital reallocated in other export-
oriented businesses and a new group of brokerage firms took the bankers’ place.
The de la Madrid administration showed more cohesion than the previous two,
as the technocrats remained in key positions of the cabinet and the national populists
were wiped off the map. The PRI suffered a fracture when a democratic faction
appeared and challenged its traditional methods. This would prove very costly for the
official party as many of its traditional supporters would join the new party that
emerged from the PRI’s division. Labor and peasants carried the burden of the
adjustments that the government implemented to deal with the crisis. Their wages lost
half of its real value during the sexenio and the government promoted the freeze of
agricultural products. These two were the least favored groups during the de la Madrid
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administration. Table II.3 presents a summary of the most relevant fiscal indicators for
the period 1970-1988.
Table II.3 Indicators for Public Sector Finances 1970-1988
Year Total
Revenues
Oil
Revenues
Total
Spending
Current
Spending*
Capital
Spending
Interest
Spending
Financial
Deficit**
1970 18.9 22.4 3.8
1971 18.4 3.0 20.5 14.6 4.3 1.6 2.5
1972 18.7 2.8 22.9 15.4 5.7 1.8 4.9
1973 20.2 2.6 25.8 17.0 7.0 1.8 6.9
1974 21.1 3.4 27.0 17.9 7.2 1.9 7.2
1975 23.2 3.3 31.9 21.0 8.6 2.3 10.0
1976 23.8 3.3 32.0 20.7 8.0 3.3 9.9
1977 24.4 3.8 30.0 19.3 7.6 3.1 6.7
1978 25.9 4.5 31.4 19.5 8.7 3.2 6.7
1979 26.7 5.6 33.0 19.5 9.8 3.7 7.6
1980 26.9 7.3 33.5 19.8 9.6 4.1 7.5
1981 26.7 7.3 39.7 21.4 12.9 5.4 14.1
1982 28.9 9.9 44.5 25.1 10.2 9.2 16.9
1983 32.9 14.2 41.0 20.7 7.5 12.8 8.6
1984 32.2 13.0 38.8 20.7 6.7 11.4 8.5
1985 31.2 11.5 39.2 21.1 6.1 12.0 9.6
1986 30.3 9.0 44.8 21.5 6.0 17.3 16.0
1987 30.6 9.8 45.0 19.5 5.6 19.9 16.1
1988 29.8 7.5 39.0 17.9 4.4 16.7 12.3
Source: Bazdresch and Levy in Dornbush and Edwards, 1991.
Note: % o f GDP
*Excluding interest payments.
**The financial deficit includes also ‘financial intermediation’ expenditures, so that it is not equal to the
difference between total revenues and total expenditures.
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ix. Conclusions
Pressure groups in Mexico vary in many ways, i.e. size, power, interests and
the kind of relationship they have with the state. Interest groups also have one thing in
common: they are rational in the sense that they pursue their best interests and try to
influence government to adopt policies that benefit them. This is the case of fiscal
policy, where every group fights for a slice of the pie that the government will share in
the form of public expenditures. So every year there is a constant battle among
different pressure groups with diverse interests to achieve their goals.
The effectiveness of these groups in influencing policies each sexenio varies
according to their relative power and the favor that they enjoy among policy makers.
This also depends on the ideology of those in power and the interests of the
administration at the time. The groups identified here, the big capital, smaller
business, labor, peasants, the PEMEX coalition, and government are not constants.
They adapt and try to accommodate to the struggles at the time, and to place
themselves in the best position possible to influence fiscal policy. In the process, they
form coalitions and alliances with other groups. They make threats or become more
accommodating toward the government with the expectation that they will receive
benefits in the future.
Considering the above, during the period under study, I argue that the state in
Mexico played a major role in policy making, and that the president was the
unchallenged leader of the state. The executive has overwhelming power and clearly
dominated the other two branches of the government, the legislative and the judicial
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83
powers. The Mexican President is an individual that brings his own ideology to the
presidency, and therefore ideology has not been a constant. In the three sexenios under
study, each president favored different interest groups, different economic policies,
and different ways of fiscal spending. Sometimes even within the same sexenio, this
led to a varying degree of influence for interest groups through time.
From the groups mentioned, big capital clearly exerted more pressure to the
government mainly via capital flight threats and withdrawing its support for the
official party. Small capital was at odds with the state for most of the period, but at the
same time was dependent on its help for subsistence. Labor comes a distant third, but
during some periods, especially the early seventies and early eighties, it received the
favor of the executive. Peasants received some benefits during the Echeverria
administration and Lopez Portillo tried to compensate them with subsidies and failed
rural development plans. The PEMEX coalition is a special case, it rose very fast in
the power echelons, reaching its pinnacle in the early eighties, but its fall was even
more dramatic than its climb.
Overall, the state-interest group relations have been very complex. This has
been an attempt understand them and an effort to directly relate them to fiscal policy.
The main observation here is that, interest groups do influence government decision
making, specifically fiscal policy. The influence is dynamic as it changes over time
and it is dependant on the actors. The pattern is that all of them try to put themselves
in a position to maximize their expected utilities, not all the times interest groups are
successful in this task, but certainly they will not stop trying.
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III. Empirical Evidence
i. Cyclicality in Fiscal Policy
This chapter considers the empirical evidence for procyclical fiscal policy in
Mexico during the period under study. By this I mean, following the procyclical
tendency of state policy makers to spend loosely during boom times and to retract
spending when crisis hits, thereby deviating from the optimal countercyclical or
acyclical patterns endorsed by economic theory.
In Table III.l, I present data on the government’s financial deficit and GDP
growth rates from 1970-1988. As the table shows, the deficit’s share of GDP varied
from a low of 2.41% of GDP in 1971 to a high of 16.95% of GDP in 1982. After
shrinking for two years following the debt crisis, the deficit hit levels similar to that of
1982 in 1986 and 1987, just above 16% of GDP. At the same time, GDP growth has
not followed a constant pattern, but rather an erratic one. Mexico’s high growth point
was in 1979 when the economy grew at an extraordinary rate of 9.7%, under the thrust
of an oil price boom and massive external borrowing. The all time low point came in
1983, as the debt shocks caused GDP to contract by 4.2%. Growth slowed from 1974
to 1977, as Stabilizing Development ran out of steam and from 1982 to 1988, as
consecutive stabilization efforts failed to take hold. The exceedingly high growth from
1978 to 1981 ended as quickly as it started, and was proven superficial as subsequent
administrations would try and fail to recapture these accelerated growth rates.
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Table III.l Government Deficit and GDP Growth, 1970-1988
Deficit Targeting, 1970-1988
Year Deficit* GDP Growth** Cyclicality
1970 -3.56 6.5
1971 -2.41 3.8 Procyclical
1972 -4.71 8.2 Procyclical
1973 -6.57 7.8 Countercyclical
1974 -6.99 5.8 Countercyclical
1975 -9.71 5.7 Procyclical
1976 -9.50 4.4 Procyclical
1977 -6.57 3.4 Procyclical
1978 -6.74 8.9 Procyclical
1979 -7.40 9.7 Procyclical
1980 -7.51 9.2 Acyclical
1981 -14.14 8.8 Countercyclical
1982 -16.95 -0.6 Countercyclical
1983 -8.61 -4.2 Procyclical
1984 -8.50 3.6 Acyclical
1985 -9.57 2.6 Countercyclical
1986 -16.02 -3.8 Countercyclical
1987 -16.04 1.8 Procyclical
1988 -11.71 1.3 Procyclical
* Deficit is government’s financial deficit as a ratio o f GDP.
** GDP growth is in constant prices.
Considering the fiscal deficit and GDP trends together, Mexican fiscal policy
behaved procyclically in 10 of the 18 years that span this study. This means that the
two variables were positively correlated, increasing or decreasing in tandem during the
same year. In six of these years they showed a negative correlation, as one variable
decreased while the other was increasing or vice-versa. Countercyclical years were
more common during recessions, as the government lags the adjustment to reduce its
spending when the economy hits a crisis. It is important to note that interest payments
on the external debt played an important role in countercyclical years. During the last
two years of the Lopez Portillo administration (1981-1982), and midway through the
de la Madrid administration (1985-1986), these interest payments increased
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exorbitantly. This made it impossible for the government to reduce its deficit, despite
deep cuts in almost every other category of public spending. Only in two of those
years was fiscal policy acyclical, meaning that both variables remained at the same
level as the previous year. This is very different from the findings of Gavin and Perotti
(1996) for the OECD countries where, as predicted by economic theory, the fiscal
deficit has been countercyclical.
During the first year of the Echeverria administration in 1971, when restrictive
fiscal and monetary policies were imposed, there was a positive relation between the
fiscal deficit and GDP, since both categories declined. The administration reduced the
fiscal deficit, as the economy was going through a slow-down. This fiscal movement
was sought by the government alone and was not well received by powerful pressure
groups. As the economy recovered in 1972 (reaching a growth rate of 8.2% more than
doubling the rate of 1971), spending pressures from interest groups on both sides of
the political sphere mounted. The government, to appease all the different economic
actors, ran a deficit that was 95.4% higher than the previous year. The political left,
led by Flores de la Pena, pushed for an increase in social spending on behalf of
workers and peasants. In the same year, education and health expenditures also
increased and current spending increased by more than 12%. Both of these years
reflect strong procyclicality in the fiscal policy followed by the government. In 1973
the economy started showing signs of another recession, but Echeverria kept spending
in order to continue with his populist program of “Shared Development”. Thus, the
fiscal deficit was increasing while GDP was contracting. The years 1973 and 1974
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represent a period where the government actually followed a countercyclical policy.
One explanation could be that neither the government nor the various interest groups
perceived the slowing of the GDP growth rate to be anything more than transitory.
Hence, interest groups kept pushing for more public spending and the government was
willing to provide it given its populist bent. By 1975 fiscal policy had again turned
procyclical as the fiscal deficit exploded while the growth rate did not vary. As the
economic situation continued to worsen, the government adjusted its spending and the
last two years of the Echeverria administration saw reductions in the fiscal deficit.
Pressures eased as interest groups realized that the Mexican economy had again
entered into crisis. During the last year of the administration both indicators declined,
although growth fell more precipitously than the fiscal deficit. Overall the Echeverria
administration ran a procyclical fiscal policy in four out of six years.
The Lopez Portillo administration started in late 1976 with the country
immersed in a full-blown economic crisis. The first year of the administration (1977),
was a typical procyclical year as the rate of GDP growth continued to decline, and
policymakers had little recourse but to reduce public spending, and therefore the fiscal
deficit. Pressures from interest groups increased, as this was the third consecutive year
of spending cuts. The oil discoveries of that year prompted the government to believe
that the economic crisis was over. By 1978 the Mexican economy seemed to be on the
rebound, posting a high growth rate of 8.9% and a moderate increase in the fiscal
deficit. The government then began a spending spree that would endure for the greater
part of the Lopez Portillo administration. This procyclical trend continued into 1979,
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when the economy experienced high growth under the impulse of the OPEC oil price
hikes and the fiscal deficit continued to increase, although not to anyone’s alarm.
Government expenditures increased in almost every spending category since oil
exports and external loans were flooding the country. However this procyclical trend
ended in 1980, as the movement of the fiscal deficit and GDP varied slightly. The
economy was still growing at a fast pace and the fiscal deficit increased minimally in
1980, rendering this year acyclical. In hindsight, 1981 turned out to be a key year for
fiscal policy, as this was the point when the first cracks in the Mexican economy were
visible and the government showed considerable confusion in its reaction. The fiscal
deficit almost doubled from the previous year, at 14.14% of GDP, while GDP growth
slowed, although not dramatically. The government mistook this slowing as temporary
and continued to pursue its ambitious spending on infrastructure projects and social
programs. Interest payments on the foreign debt were part of the problem, but
government expenditures in other areas kept increasing as well. The story of 1982 is
more dramatic, as the Mexican economy collapsed, the growth rate declined by 9.4%
and was negative for the first time in the post-war period. The fiscal deficit kept
increasing and reached an all time high of almost 17% of GDP. Mexico’s interest
payments skyrocketed in response to the U.S. Federal Reserve’s tightening of
monetary policy. Meanwhile, few cuts were made in other spending categories. The
years 1981 and 1982 were atypical because fiscal policy was countercyclical, due to
the fact that the government was immersed in a spending spree that was out of control.
At the same time, the government’s diagnosis of the economic situation was that it
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89
was a temporary liquidity problem, and the multilateral institutions encouraged this
view. These trends were all the more worrisome, given that current spending was
being financed by external credit at increasingly higher interest rates and much shorter
timelines on repayment. It is evident that the actual intention of the government was
not to run a countercyclical fiscal policy in those years, as this outcome was due to the
high interest payments being made.
The de la Madrid sexenio started in 1982 under very tough circumstances, but
the new administration offered a clear strategy for dealing with the situation. A plan
was drawn up under the guidance of the IMF, with the goal of deficit reduction at its
core. This was to be achieved via a restrictive fiscal policy, which included cuts in
almost every category of government spending. The GDP growth rate remained
negative in 1983 at -4.2%, while the deficit was cut almost in half compared to the
previous year’s deficit of 8.61% of GDP. Procyclical behavior again set in. In 1984,
the economy rebounded and registered a positive path of growth for the first time in
three years, while the deficit remained basically at the same level. Therefore, fiscal
policy was acyclical. The government increased social spending, as the most needy
sectors of the population pressured for help to deal with the severe crisis.
In the following year, 1985, the Mexican economy still faced tough conditions.
The government was forced to ease its austerity measures due to a terrible earthquake
that hit Mexico City in September 1985. According to the two variables under scrutiny
here, 1985 was one of those years when fiscal policy was countercyclical — the
growth rate declined and the fiscal deficit rose. But again countercyclical fiscal policy
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was caused by external circumstances and not by the government’s choice.
Notwithstanding, government spending under de la Madrid was still running far below
the levels of the previous administration. As Table III.l shows, 1986 did not look
promising from the beginning and would constitute the low point for the sexenio. Oil
prices were collapsing, interest payments and inflation soared, and the country faced
the need for major reconstruction in Mexico City after the damages of the earthquake.
In this year the growth rate continued its downward trend, becoming negative again,
while the fiscal deficit returned to the 1982 levels. For the second year in a row fiscal
policy was countercyclical, which leads to the finding that interest payments were the
principal cause for this behavior. The next year, 1987, was also procyclical: the fiscal
deficit increased moderately and GDP returned to positive terrain. Interest on the debt
reached the all time high of 18% of GDP and the government kept making
adjustments in other spending categories. By 1988, the last year of the de la Madrid
administration, the government’s fiscal retrenchment had reduced the deficit by 36%
and decelerated growth, partly due to the stock-market collapse that occurred in the
last quarter of 1987. The government, in a tremendous yet unsuccessful effort at
macroeconomic stabilization, continued with its tendency to follow a procyclical fiscal
policy.
What do the six countercyclical years and the two acyclical years of fiscal
policymaking have in common? It seems the government’s departure from a
procyclical stance came during those years when GDP growth rates decreased, but the
deficit increased, rather than being adjusted to the slower growth. The argument
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91
demonstrates that due to pressures from interest groups, it was difficult for the
government to reduce expenditures. Once interest groups realized that the pie had
gotten smaller, pressures eased and the government was able to follow a
contractionary fiscal policy to correct imbalances, thus leading to procyclicality. In
most of the years when the economy followed a countercyclical fiscal policy, the
government had to devote a considerable part of its resources to interest payments on
the debt. This made it hard to reduce spending, in ways similar to other downward
fiscal adjustments that had been implemented prior to 1982. Figures III.l to III.3 show
the procyclical behavior of government total spending, the government financial
deficit, and the debt interest payments paid by the government. These figures help us
realize the strong correlation that exists between these variables and the economic
cycle in Mexico. I use HP-filtered data to account for only cycles and not trends.
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Figure III.l GDP vs Government Total Spending
GDP vs Gov Total Speding
500 600
400
400
300
200
s 200
c
o
100
E
-100
-400
-200
J -300 -600
Years
-♦— GDPRCY
GTCY
Figure III. 2 GDP vs Financial Deficit
GDP vs Financial Deficit
600
400
200
c
o
E
-400
-600
Years
300
200
100
0
-100
-200
-300
-400
-500
•GDPRCY
FINDEFCY
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93
Figure III.3 GDP vs Government Debt Interest Payments
GDP vs Debt Interest
250
200
150
100
600
400
200
c
o
E
-50
-100
-150
-200
-400
-600
Years
-♦— GDPRCY
- m - DITOTCY
ii. Measuring Cyclicality of Variables
Table III.2 reports the (3-cyclicality coefficients for some components of
government spending. I measure cyclicality by the correlation between (HP filtered)1
government spending and output, the same way as Agenor et al (1999), Stein et al
(1999), and Talvi and Vegh (2000). The coefficient values show that federal
government capital spending (FGCAP) and government spending on education (GED)
tend to be mildly procyclical, as they are lower than .06. Federal government
budgetable current spending (BCU), public sector current transfers (TRPSC) and
government social spending (GSOC) all have values between .06 and .10, which
1 Note: I ran the regressions with both, the standard X coefficient that is given by Hodrick and Prescott
(1997) and different adjusted values, but the results do not change in a meaningful way.
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94
suggests that they are more procyclical than the previously mentioned spending
categories. The coefficient values for public sector current spending (PSBCU) and
government investment (GI) are bigger than .10, meaning that they are the most
procyclical. The most procyclical variable is government consumption (GCONS) at a
level of .76, supporting the findings by Talvi and Vegh and Stein et al. The financial
deficit (FINDEF) variable is acyclical, contrary to what economic theory suggests,
which is that it should be countercyclical and used to smooth the economic cycle.
Figure III.4 shows the procyclicality of public investment (GI).
Table III.2 Cyclicality Coefficients
Variables 6-coefficient R-squared t-statistic D-W
BCU .080 .44 4.22 2.07
PSBCU .198 .53 4.98 1.46
GI .257 .46 5.04 1.55
FGCAP .047 .15 2.30 1.28
TRPSC .074 .33 3.30 1.22
GSOC .062 .22 2.70 1.74
GED .057 .14 2.02 1.40
GCONS .760 .35 2.16 1.87
FINDEF -.001 .19 -2.63 1.57
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95
Figure III.4 GDP vs Public Investment
GDP vs Public Investment
600
400
200
c
o
E
v *
-10
-20 -400
-30 -600
Years
-♦—GDPRCY
■ ■ ■ ■ » GICY
Table III.3 reports the (3-cyclicality coefficients for some components of
government spending based on Hodrick-Prescott filtered data. The idea is exactly the
same as that of Table III.2, but this time I use data from periods t+i for some select
variables to calculate the cyclical component in period t which are ex-post measures of
the cycle, since some variable may react with a lag with respect to the business cycle.
The coefficient values show that wage government consumption (WGC) is mildly
procyclical, while non-interest government current spending (NIGCURR) and non
interest government total spending (NIGTOT) have a much higher degree of
procyclicality. This may be due to the weight that interest payments on the debt have
on government spending, since they do not vary as much with the cycle. The ratio of
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the primary deficit to GDP (PDY) is acyclical, again showing that the government
does not use its primary deficit in line with tax-smoothing predictions.
Table III.3 Cyclicality Coefficients Lagged One Period
Variables 6-coefficient R-squared t-statistic D-W
NIGCURR .227 .41 4.41 1.48
NIGTOT .239 .40 4.38 1.59
PDY -0.004 .16 -2.32 1.40
WGC .047 .18 2.19 1.75
Next I compare these results to those obtained for a group of OECD countries
by Lane (2002). From Lane’s results, presented in Table III.4, Ireland and Portugal
present the most procyclical fiscal policy of the sample. For the OECD countries the
6-coefficient shows that current government spending is mildly countercyclical
(GCURR) -0.09, for Ireland and Portugal it is procyclical at .26 and .36 respectively,
while for Mexico public sector current spending (PSBCU) is also procyclical with a 6-
coefficient of .19. So, with respect to current spending, Mexico shows a more
procyclical fiscal policy than the OECD countries, but a less procyclical one than
Ireland and Portugal. When debt service payments are excluded from current spending
(NIGCURR), the OECD sample shows more countercyclicality along the lines of
economic theory, at -0.12, while Ireland remains the same at .26, and Portugal and
Mexico both increase their procyclicality to .51 and .22 respectively.
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Government investment (GI) is the most procyclical component of government
spending for the OECD sample with a coefficient of .84; Portugal’s coefficient is .44,
being below the mean; Ireland is 1.67, very procyclical; and Mexico shows a
coefficient of .257, the lowest of all the countries in comparison. These coefficients
show that in this category, the OECD countries move as economic theory predicts and
more procyclically than Mexico and Portugal. Government total spending when
interest payments are excluded (NIGTOT) is acyclical for the OECD countries -0.03;
for both Ireland and Portugal it is procyclical, at .43 and .48 respectively; for Mexico
it is also procyclical, but to a lesser extent than these two other countries at .22.
In my analysis of wage government consumption (WGC) in the OECD sample,
Ireland and Portugal show higher procyclicality than Mexico, with .15, .28, .62, and
.04 respectively. Thus, Mexico is mildly procyclical. When comparing the
government’s ratio of the primary surplus and GDP (PSY) some interesting findings
emerge. It should be noted that I used the variable primary deficit (PDY) for Mexico.
Economic theory suggests that since this variable should be used by the government to
smooth the economic cycle, this variable should be procyclical. It turns out that the
OECD countries indeed show procyclicality in their primary surplus ratio with a
coefficient of .28; Portugal follows this trend, but more mildly at .16; Ireland and
Mexico’s coefficients show that they are acyclical, at -0.03 and -0.04 respectively.
This means that these latter governments do not use the primary surplus to smooth the
economic cycle; basically they do not vary their fiscal policy to fit the economic cycle.
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Table III.4 Cyclicality of 6-Coefficients for OECD countries, Ireland, Portugal,
and Mexico
Variables OECD Ireland Portugal Mexico
GCURR -0.09 .26 .39 .227
GI .84 1.67 .44 .257
NIGTOT .03 .43 .48 .239
NIGCURR -.12 .26 .51 .227
PSY .28 -.03 .16 -0.04
WGC .15 .28 .62 .047
Note: Data for OECD, Ireland and Portugal from Lane (2002).
In Talvi and Vegh’s model, political economy factors generate
procyclicality in fiscal policy. When in economic booms governments run a
fiscal surplus, interest groups pressure for higher public spending. An important
feature of Talvi and Vegh’s model is that, in general, these spending pressures
are an increasing convex function of the primary surplus. That is, the larger the
boom, the more severe the political distortion. The logic behind this model is
that spending pressures will vary according to the political sensitivity of a
particular category. Different groups prefer spending in certain categories more
than in others, depending on where they can reap greater benefits. So there may
be some differences in the cyclicality of each spending category based on how it
relates to the nature of the prevailing political equilibrium (in terms of the
distribution of political influence across interest groups). In their model Talvi
and Vegh present the following equation of government expenditures to explain
the cyclicality of fiscal policy:
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gt = g + f(PSt),
g is the exogenous component
gt is the endogenous component which is assumed to be a non-negative, non
decreasing, and convex function of the primary surplus
where the function f (PS) satisfies
f(-) > 0, f ’(-) > 0, f ” (.) > 0,
and the primary surplus, PSt = 0t et + zt - gt.
f (PSt) - endogenous component, assumed to be non-negative, non-decreasing
and a convex function of the primary surplus.
0t is the consumption tax, ct is consumption at period t, 0tct are the proceeds of
the consumption tax received by the government, and zt is an endowment flow
from a natural resource owned by the government.
This specification includes as a special case (i.e., f(PS) = 0) the
standard optimal fiscal policy problem in which government spending is taken as
exogenous, “The Barro Case” (not determined by the model, the government
does not have any power to change spending). The f(PSt) is a political distortion
which characterizes the workings of actual economies. In a world with no
political distortions, spending decisions by the government would be based
solely on an evaluation of social costs and benefits, and would thus be
independent of the business cycle and captured in the equation by g. While the
assumption that spending pressures are an increasing function of available fiscal
resources seems plausible, it might not be as obvious why spending pressures
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may increase at an increasing rate. The model takes as given the political
pressures that play a critical role for additional spending and seem to multiply in
response to revenue booms. With this said, the convexity of the f(.) function is
not necessary for the model. If government consumption is included in the utility
function (i.e., government consumption is a substitute for private consumption in
utility terms, along the lines of Barro (1981)), a linear f(.) is all that is needed for
the same results to be obtained.
When applying this notion to the Mexican case, the distortions behaved
very similarly to what Talvi and Vegh predicted. During the Echeverria sexenio,
the public deficit started increasing as the economy was achieving high growth
rates. The interesting feature here is that the public deficit remained within
manageable limits for most of the sexenio and when the economy slowed down
its growth, in the last year of the administration, the deficit declined in response
to the new crisis situation.
The Lopez Portillo sexenio started in 1976 with the economy immersed
in a crisis, and the administration followed a contractionary fiscal policy along
IMF guidelines to correct fiscal imbalances. This again follows Talvi and Vegh’s
predictions; a crisis followed by a reduction in the fiscal deficit, as interest
groups ease lobbying pressures knowing that the government does not have
resources to spend. But once the oil price boom started in 1978, pressure groups
scrambled to reap the profits from the government’s oil rents. The government’s
deficit increased again as the economy accelerated its growth. Since
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policymakers perceived the oil boom as a permanent shock, the fiscal deficit
increased beyond limits, as all interest groups profited in one way or another.
When the economy started showing signs of deterioration, policymakers saw this
as a temporary slowdown and refused to change the spending trend. This
approach, together with the high interest that the government was paying on the
external debt, explains the reasons why fiscal policy became countercyclical.
When the de la Madrid administration began, economic policy changed
considerably. It was a time of crisis, and since many blamed the government’s
financial errors, the first corrective move was to reduce the fiscal deficit. This
was accomplished by cutting public spending in almost every category. The
result was that the fiscal deficit was almost halved, while the GDP growth rate
plummeted to -4.2% . This provoked an even deeper crisis and a typical
procyclical fiscal policy response by the government. The crisis was severely felt
by all of the principal interest groups, with labor bearing enormous real wage
cuts. Job creation was stagnant, as investment was sharply reduced by the
government and by the private sector. The following year the government
continued with its efforts to reduce the fiscal deficit, by further cutting spending,
while the GDP growth rate rebounded. However, none of the economic
fundamentals had changed. After two years of a countercyclical fiscal policy,
when the fiscal deficit increased while the GDP growth rate fell, fiscal policy for
the last two years of the administration returned to procyclicality. In 1987 the
public deficit rose to the levels of 1982 and the economy grew at a faster rate.
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During the last year of the de la Madrid sexenio, new efforts were carried out by
the government to reduce the deficit and the economy’s growth lagged again.
These outcomes are consistent with the Talvi and Vegh assumption: for most of
the sexenio, the economy was immersed in crisis and interest groups therefore
moderated their economic pressures. In many cases, the groups even supported
the fiscal restraints that the government was imposing.
Table III.5 presents the 6-coefficients for some relevant government
revenue categories. As the data shows, both the public sector and the federal
government’s revenues behave procyclically. This means that revenues have a
positive correlation with real GDP and therefore with the economic cycle.
When these results are compared with the ones in Tables III.2 and III.3, it
becomes clear that when the economy is growing and the government is
receiving more revenues, it increases public spending.
Table III.5 Cyclicality of Public Sector and Federal Government Revenues
Variables 6-coefficient R-squared t-statistic D-W
FGREVTOT .08 .17 2.47 1.91
PSREVTOT .11 .13 2.04 1.49
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Conclusions
Over the time period analyzed in this dissertation, and as confirmed by the
data presented in this chapter, Mexico has for the most part followed a procyclical
fiscal policy. Most of the years under study here show that there is a positive
correlation between the fiscal deficit and GDP growth. Government spending in
diverse categories increases in times when the economy grows and decreases when
the economy slows its rate of growth. These findings generally support my argument
about the procyclical behavior of fiscal policy in Mexico. Government revenues are
also procyclical, supporting the idea behind Talvi and Vegh’s model that in good
times, as the government collects more revenues, pressures from interest groups
increase and the government concedes. If the government were not subject to these
societal pressures, the ideal behavior would be to repay the debt that was contracted
in periods of crisis. This would allow the government to incur more debt when bad
times hit the economy and to spend that money in a countercyclical manner. If fiscal
policy behavior did not vary during the business cycle, it would be acyclical and
therefore also supported by economic theory.
Another finding in this study is that during the years when fiscal policy
behaved countercyclical^, all of these variables followed the same pattern. As the
GDP growth rate decreased, the government increased its fiscal deficit because it did
not consider the slow downs of the economy or the negative shocks to be permanent.
This is in line with the findings of Arreaza et al., that governments tend to provide
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more smoothing of negative than of positive shocks. But as time went by and the
economy did not recuperate, the government reduced its spending and imposed
restrictive fiscal policies, returning to a procyclical pattern. This counter-productive
behavior has characterized the Mexican government’s policy approach over these
years: to impose fiscal restraints at the very point when the economy is already
going through difficult times.
When fiscal policy variables from Mexico were compared with Lane’s
results for an OECD sample of countries, Mexico’s fiscal policy turned out to be
more procyclical than that of the OECD sample. When compared to Ireland and
Portugal, Mexico has a less procyclical fiscal policy, but it is around the same levels
of procyclicality as these countries in some categories. My main conclusion from
this data is that the maintenance of a procyclical fiscal policy is not an optimal
strategy for the government. Acyclicality and countercyclicality would be preferred,
as fiscal policy should be used to smooth the economic cycle or at least not to
exacerbate it. The wellbeing of many economic agents, as well as the population at
large, would be better promoted in this way. But it should not be surprising to find
this behavior from the government, since it acts according to the argument presented
by Talvi and Vegh that the government concedes to pressures in times of economic
expansion and has to go back to fiscal restraint in times of recession; Mexico is no
exception.
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IV. The Lack of Political Business Cycles in Mexico
i. Introduction
This chapter presents empirical evidence negating the existence of political
business cycles in Mexico. I start with a historical overview of the Mexican political
system as a background to understand why certain particularities of it are relevant to
the absence of a political business cycle. Then, I use the theory of the rotating bandit
to explain the behavior of presidents in a country like Mexico, where they face a fixed
term in office, imposed by a non-reelection rule. This rule diminishes the incentives
for presidents to look beyond their term and reduces the motives to spend before an
election. I review some recent studies on political business cycles and find that there is
no evidence of their existence in other countries, just like in Mexico, making my
argument in line with current literature. Then, I assign proxy-variables to each interest
group in order to quantify the degree of influence that each pressure group may exert
over the government. Finally, I test whether there is evidence of the existence of a
political business cycle in Mexico using some econometric models. All these
combined supports the evidence found in Chapter III of this dissertation that Mexican
fiscal policy is procyclical.
ii. The Mexican Political System
Mexico stands out as a special case when we analyze the relationship between
political and economic behavior in that there is little evidence of a political business
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106
cycle. In this section, I describe the way in which the Mexican political system is
constituted and how it works in practice. It is necessary to go back in time to
understand how this system evolved in the way it did. Even a brief historical review
confirms the absence of a political business cycle.
Mexico achieved independence in 1821, after which it experienced
innumerable struggles to become a sovereign nation that included: a war against the
United States where Mexico lost half of its territory; the Reform period; and a battle
for power between conservatives and liberals. Starting with the presidency of Porfirio
Diaz in 1876, all those years of conflict were quelled by an iron fist dictatorship
commonly called the ‘Porfiriato’. In those years Mexico experienced unprecedented
growth and economic development. Although prosperous, the Porfiriato lasted for
over 30 years, prompting a 1910 revolution that demanded “effective suffrage and no
reelection.” This idea of no reelection would be preserved in the Constitution of 1917
and in the revolutionary principles of the political party that emerged after the conflict,
the National Revolutionary Party (PNR).1 One of the main goals of the constitutional
effort was to prevent another dictatorship, which had created many anomalies in the
system. For example, after finishing their six-year term or sexenio, Mexican presidents
traditionally remained outside of the political arena and disappeared from public life,
as no elected official in the country could be reelected for a second term in office. The
prohibition on reelection in the legislature was promulgated as part of a plan to limit
the influence of local caudillos.
1 See Krauze (1997).
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As I explained in chapter II, Mexico has a presidentialist system, where the
president has enormous power, both constitutional and supraconstitutional, and up
until the late 1990’s the legislative branch of the government offered no effective
counterweight to his authority. By 1988, the last year covered in this study, the
president still had traditional power over labor, the treasury, public administration,
cultural affairs, elections, and the decentralized agencies like the Central Bank and the
parestatal industries. The president had the authority to appoint and dismiss diplomatic
staff, the mayor of Mexico City, cabinet members, high level bureaucrats, army
officers, and Supreme Court justices.2
Besides the powers already assigned to the president by the constitution, the
particular way in which Mexico was governed by the same PRI party for over 70
years, and the liberty that the president enjoyed to amend the constitution at its will,
further contributed to the disproportionate influence that the president had in the
decision making process and the government itself. In a study about Mexican
Presidentialism, Garrido argues that every president has modified the constitution to
augment the constitutional powers of the executive,3 and that the legislature has
seldom acted as a real balance to presidential power. This is because the PRI held over
70% of the seats in Congress for all of the period under consideration in this work,
(see Table IV. 1 for details on legislative representation in Mexico.) In Mexico
congressmen are elected for 3-year terms, and senators for 6-years. Although
legislators are able to run for office again after at least 3 years of leaving charge, there
2 Grier and Grier (2000).
3 Garrido (1989).
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are not many incentives for reelection. Without the possibility to be immediately
reelected, politicians had little chance of using their constituency to launch a long-
lasting and stable political career. Haggard and Kaufman point out that “basically one-
third of all middle and top level officials were replaced with each presidential
turnover, and that over two-thirds failed to hold onto office over a twelve year
period.”4 This means that there is no political class with enough experience, seniority
and power to counterbalance the president’s power. Since the PRI controlled the
federal bureaucracy, and therefore most of the patronage jobs, the PRI was the surest
rout to a political career. The result is that a great number of legislators were first
timers, with little experience, and even less incentive to learn about the legislature.
Since most power was held by the executive anyway, legislators were traditionally
loyal to the president.5
All of these factors combined gave the president and his team considerable
control over economic policy making. And, during the period under study here, the
Mexican government was the key actor in the economic life of the country. Bazdresch
and Levy go as far as to say that “government, in the Mexican context, means the
executive branch.”6 A main consequence of this 6-year non-renewable presidential
time horizon was the absence of incentives to use power wisely or in the best interests
of the country. The fact that the PRI candidate won every presidential election until
2000, regardless of policy outcomes under the PRI, confirms that political competition
4 Haggard and Kaufman, 1995, p 272. See also Smith, 1981.
5 Ibid.
6 Bazdresch and Levy. In Donrnbush and Edwards eds., (1991), 226.
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was close to non-existent. Thus, the Mexican president emerges as virtual autocrat
during the three sexenios that I analyze here.
Table IV .l Electoral Support and Legislative Representation in Mexico 1979-2000
Percentage o f Congressional Vote*
Year PRI PAN Left** Other
1979 74.0 11.5 5.3 9.1
1982 69.3 17.5 5.9 7.3
1985 68.1 16.3 6.3 9.2
1988 51.1 18.0 29.6 1.3
1991 61.5 17.7 8.9 12.0
1994 50.3 25.8 16.7 7.2
1997 39.1 26.6 25.7 8.5
2000 38.0 39.4 19.2 3.3
Source: W ise (2003).
* Figures reflect percentage of valid vote
** “Left” refers to the independent left and not PRI satellite parties; beginning in 1988, this includes
left parties in alliance with the PRD.
Table IV.l Continued
Percentage of Congressional Seats___________ Percentage o f Presidential Vote
PRI PAN Left Other PRI PAN PRD
74.0 10.8 4.5 10,8
74.5 12.8 4.3 8.3 77.4 14.5
72.3 10.3 6.0 11.5
52.0 20.2 27.8 50.7 16.8 31.1
64.0 17.8 8.2 10.0
60.0 23.8 14.2 2.0 48.6 25.9 16.5
47.8 24.2 25.0 3.0
41.8 44.6 13.6 0.0 36.1 42.5 16.6
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Given the PRI’s uncontested hegemony, we should expect a large degree of
continuity in the policies followed by different presidents. However, earlier chapters
of this dissertation have shown this to be anything but true. This is because the PRI is
not like other political parties, for example, the Democratic or Republican parties in
the United States, where the party itself has developed around of a core of values and
beliefs. Needier describes the PRI as “not being involved with economic policy
making, but rather having mainly functions of electoral organization, mass
n
mobilization, and integration of intermediary groups.” Until 1988 the PRI was a
perfect electoral machine that used co-optation to appease groups and solve problems,
and aimed to retain power while never showing a consistent approach to economic
policy making.8 The PRI was a collection different interests, who’s only aim seemed
to be the retention of political power. Rather, there has been little continuity from one
president to the next. If we consider the period from 1952 to 2000, the PRI produced
very different leaders from all over the political and economic spectrum. This includes
the moderate Ruiz Cortinez administration, the economic ally conservative but
politically left Lopez Mateos administration, the more rightist term of Diaz Ordaz, the
populism of Echeverria and Lopez Portillo, and the subsequent neo-liberals, de la
Madrid, Salinas and Zedillo. Ideological changes came and went with each president,
and this was also reflected in the legislature. The same PRI-controlled Congress
supported the nationalization of the banks in 1982 under Lopez Portillo, but backed
7 Needier (1987), 73.
8 Grier and Grier (2000).
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I l l
the privatization of the banking system by Salinas. In the next section I seek to analyze
these trends from a more formal standpoint which borrows from the recent literature.
iii. The Theory of the Rotating Bandit
There are two main kinds of models in the literature that relate economic
performance with elections, political business cycles and rational partisanship. The
phenomenon of political business cycles has attracted a considerable amount of
attention from economists and political scientists in recent years. Political business
cycles refer to the range of political considerations which influence macroeconomic
policy making, where an incumbent president seeks reelection by using public
spending and other tools to artificially affect the economic business cycle. Here, a
short-sighted voter bases his or her vote solely on recent economic performance, and
the incumbent president attracts votes that otherwise would have gone elsewhere. The
main controversies among those who study political business cycles are: how
consistently the political business cycle game has been played and whether voters’
process of rational learning limits the political gain derived from playing the game.9
The problem here is that political business cycles do not occur in every country or
every election, and recent studies show that there is little evidence of a widespread
existence of political business cycles. In rational partisan models, there are two parties
with known preferences who compete for the presidency. The public faces uncertainty
about future policies as the election draws closer, and policy uncertainty becomes
9 Dillon and Willet. In Willet ed. (1988).
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112
intertwined with electoral uncertainty. After the election the uncertainty is resolved, so
these models predict higher uncertainty before rather than after an election. While the
United States is a good fit for this model, Mexico does not conform to the model’s
assumptions.
This should not be surprising, since political business cycles hinge on
reelection goals and the rational partisan model relies on electoral uncertainty caused
by effective political competition, neither of which prevailed in Mexico during the
period under study. Again, Mexico is best described as a system based on an all
encompassing centralized government, from 1970-1988, with no chance for reelection,
and little political competition. Along these lines, Grier and Grier analyze the effects
of elections on the economic performance of the country. In doing so they adapt the
model of McGuire and Olson (1996) to develop predictions about how the electoral
cycle might affect economic growth and uncertainty in a country like Mexico.1 0 The
argument that McGuire and Olson use for the emergence of autocratic governments is
that, unprotected peasants are at the mercy of roving bandits, who, lacking secure
property rights to exploit them, take everything they can in a hit-and-run plunder. In
these circumstances, peasants will actually prefer the emergence of a stationary bandit
who conquers and establishes a secure property right to exploit the citizenry.1 1 In this
model the autocrat, acting as a purely self-interested individual, provides a
surprisingly high level of public goods: he chooses a level of confiscation to maximize
1 0 Grier and Grier (2000).
1 1 Ibid., 240.
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his wealth, and invests in public goods up to the point where his share in the increase
12
equals the marginal resource cost of providing the good.
Grier and Grier model a case when the autocrat is insecure or has a short time
horizon and thereby show that McGuire and Olson’s analysis breaks down. This is
because public goods provide benefits that extend beyond the autocrat’s horizon,
meaning that those benefits will not be taken into account when he calculates his
profits. McGuire and Olson argue about the importance of a long time horizon for
aligning the interests of autocrats and citizens: “Autocrats, whenever they have short
time horizons, become, in effect roving bandits.”1 3 Their main idea is that with respect
to macroeconomic performance, it is better to have a farsighted autocrat than a short
sighted one, the latter being exactly what happened in Mexico due to the non
reelection rule.
Grier and Grier assume the following three conditions in their model: 1) the
president is a true autocrat with an encompassing interest in his state; 2) the executive
serves a fixed, N-period term with absolutely no reelection; and, 3) there are few
incentives for the current autocrat to look beyond his own time horizon when making
policy decisions. In their model the time horizon of the autocrat shrinks systematically
throughout his N years in office, and by the end of his term the horizon for decision
making collapses. This means that as time goes by, the horizon gets shorter and the
president’s decisions become increasingly distorted relative to what is best for society.
If the president has control over economic decision making, as is the case of Mexico,
1 2 Ibid., 240-241.
1 3 McGuire and Olson (1996), 34.
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we should observe a decline in economic performance at the end of his term or the
beginning of the next term, depending on the lag between bad decisions and economic
performance.
Grier and Grier find a significant post-election economic collapse but no pre
election boom, which is contrary to the predictions of the traditional political business
cycle model but true to the predictions of the rotating bandit model. They also find
evidence that elections create, rather than resolve, uncertainty, which inflation
contradicts the predictions of the rational partisan model, but again fits with the
rotating bandit model. As Figure IV. 1 shows, the average growth rate is only about
1% in the first year of a given sexenio, increasing steeply in the second and third years
to above 8% and 6% respectively; growth slows in the fourth year, down to just over
3%, as well as in the sixth year, but the fifth year is another one of high growth
averaging more than 1%. The evidence shows that sexenios have a significant effect
on economic growth. But the effect collapses in the year after a presidential election,
which is consistent with the predictions of the rotating bandit model.
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Figure IV. 1 Real Industrial Production Growth over the Electoral Cycle
Real Industrial Production Growth over
the Electoral Cycle
10
8
1 6
s
°> 4
5?
2
0
— --------
n
I n
2 3 4 5
Years of the Sexenio
Source: Grier and Grier (2000).
Grier and Grier also find that uncertainty is much higher in the year after a
presidential election than in the rest of the electoral cycle, again closely resembling the
predictions of the rotating bandit model. In Mexico, I would argue that this uncertainty
is caused by the lack of a core ideology within the PRI, and thus the public does not
know what economic policies to expect from the incoming president. He might
maintain the policy bent of his predecessor, or completely reverse course and launch a
new set of policies according to his own biases. Other sources of uncertainty are the
no-reelection constraint and the turnover of the top federal bureaucracy where
patronage appointments prevail.
Delays in adjustment policies are common in Mexico and the rotating bandit
model predicts that as the election nears, the autocrat will have little incentive to incur
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116
short-term costs to achieve long-term benefits. Even in an electoral-authoritarian
regime where the executive fades from public life after completing his term, Mexican
executives have sought to preserve their own ‘legacy’ at the expense of marring that of
their successors. This is the basic scenario behind the dramatic devaluations and
currency crises that have marked the end of one sexenio and the beginning of another,
as the new administration has had to clean up the macroeconomic mess left by his
predecessor.
With regard to the corresponding patterns of government spending, the rotating
bandit model implies a lack of pre-election stimulation because the autocrat cannot be
reelected. Grier and Grier find spending decreases drastically the first year after
election, peaks in the second year, decreases in the third year and remains constant for
the rest of the sexenio, again showing no evidence for the political business cycle
model. Figures IV.2 and IV.3 show the behavior of real total spending and real
investment over the electoral cycle. The averages are calculated from data that cover
the period between 1961and 1996.
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Figure IV.2 Real Total Spending Growth over the Electoral Cycle
Real Total Spending Growth over the Electoral
Cycle
1
£
e >
15
T"
10
e
0
,
-5
-10
-15
□
II
*
n
I Series 1 1
Y ea rs o f th e S exen io
Source: Grier and Grier (2000).
Figure IV.3 Real Investment Spending Growth over the Electoral Cycle
Real Investment Spending Growth over the
Electoral Cycle
6
4
2
I o
s
o > _ 2
5 ?
-4
-6
-8
ill
I Series 1
Y ea rs of th e S exen io
Source: Grier and Grier, 2000.
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iv. Comparing the Mexican Case to Others
Many studies have been done about political business cycles in the United
States and other countries, but what about their relevance to the Mexican case? In this
section, I review the most useful approaches for better understanding the inner
workings of Mexican fiscal policy. In a recent study by Alesina et al. (1997) find that
there are systematic differences in the rates of output growth, inflation and monetary
growth for the United States between Democratic and Republican administrations. In
their model they use a political dummy exactly like the one used in the models
presented in section v of this chapter. The coefficients of their dummies are
insignificant even if most of the coefficient signs are as expected. Evidence from
short-and long-term interest rates confirms the hypothesis that the more inflation-
prone Democratic administrations experience systematically higher nominal interest
rates. They find no evidence of partisan differences in government spending or fiscal
deficits. There is no evidence of a systematic bias toward fiscal deficits during
Democrat administrations; although, Democrats may be more likely to increase
government spending, they are also more likely to raise revenues so that they do not
appear to experience a greater propensity toward fiscal deficits than the Republican
administrations.
Alesina et al. also find little evidence of a pre-electoral cycle in the
macroeconomic variables of the United States over the post-war era. They do not find
evidence that monetary policy is more expansionary before elections. Neither
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119
monetary aggregates nor interest rate data show any evidence of a pre-electoral
expansionary monetary policy. There is no evidence that the economy grows faster
than average or that the unemployment rate is lower than average in election years,
and consistent with these observations, there is no post-electoral increase in the
inflation rate. There is also no evidence of a pre-electoral opportunistic manipulation
of fiscal policy, as fiscal deficits are not significantly higher during election years.
They do not find any systematic evidence that the government in general increases
public spending or expands the fiscal deficit in periods prior to an election. There is no
evidence that government transfers to individuals increase close to presidential
elections.1 4
The lack of opportunistic cycles in macroeconomic variables coupled with the
evidence of a strong effect of election year economic conditions on electoral results is
consistent with the models of rational retrospective voting. Politicians’ incentive to
manipulate monetary and fiscal policy to stimulate the economy arises because the
economic performance in the election year significantly affects the outcome of
presidential elections. Evidence suggests that the American voter punishes the party of
the incumbent president when the economy is in a recession and rewards the
incumbent and his party if the economy is growing at a healthy rate. But Alesina et al.
could not find concrete evidence that a political business cycle actually exists in the
United States. All these, contradicts the idea that political business cycles are the norm
in most countries. Even though, the United States and Mexico have very different
1 4 Alesina et al. (1997).
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political systems and their economies are distant from operating in the same way,
there is little evidence in both countries that they follow a political business cycle. It
seems that the belief of the existence of political business cycles is outdated and that
countries actually behave in a very different way in the political and economic arenas.
The study of political influences over fiscal policy making goes back to the
public choice school of Buchanan, who suggested that fiscal policy in democratic
regimes is subject to systematic political biases.1 5 The opportunistic political business
cycle model hypothesis predicts that growth will instead accelerate (and the
unemployment rate will fall) around the end of every administration. This does not
happen in Mexico as shown in Figure IV. 1. In the year prior to an election the
economic growth drops considerably and is below the average for any given sexenio.
As for the inflation rate, the partisan model suggests that the average inflation rate will
be higher during a Democratic administration than under a Republican one, especially
when exchange rates are flexible and the monetary authority has a large degree of
monetary autonomy. In the political business cycle model, the inflation rate tends to
accelerate after an election as lagged effects of the pre-electoral expansion are
transmitted to the price level.1 6 For Mexico during the period under study, inflation
dropped in every year after election, going from 27.2% in 1976 to 20.7% in 1977,
from 98.9% in 1982 to 80.8% in 1983, and from 51.7% in 1988 to 19.7 in 1989. Again
Mexico fails to comply with the predictions of the political business cycle model. This
is probably because in Mexico every incoming president came with the aim of
1 5 Buchanan et al. (1986).
1 6 Hibbs (1977).
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121
adjusting the economy and winning public support in the early stages of his
administration.
Alesina et al. argue that if there is any evidence of political business cycle
effects, it is of a very different nature than previously thought. Instead they find a
common partisan behavior where Democratic administrations are expansionary in the
first half and observe a significant increase in the inflation rate by midterm. Because
high inflation may become a significant electoral liability, Democratic administrations
contract the economy so that by the election year there is a growth slowdown and a
reduction in the inflation rate. Republican administrations that had anti-inflationary
recessions in their first half pursue low inflation and accelerating growth in the second
half, a combination that might give them an electoral benefit. Since in Mexico there
has only been one dominant party, this partisan behavior is non-existent. What I have
found is that Mexico consistently runs a procyclical fiscal policy, as shown in Chapter
III of this dissertation, so the focus of our research should be around this issue.
Alesina et al. also test a sample of 18 OECD countries and, again, fail to find
any evidence of an electoral cycle for growth and unemployment, although they find a
post-electoral upsurge in inflation. Mexico is no exception to this lack of evidence of a
political business cycle. The empirical analysis presented in section v. in this chapter
supports this affirmation.
Dillon and Willet affirm that political business cycles do not occur regularly at
every election. Moreover, if such cycles occurred in each election, the public would
catch on over time and there would not be any political gain as the public will discount
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122
that behavior.1 7 Another study that fails to find evidence of the existence of political
business cycles is McCallum (1977) where he analyzes the relationship between
patterns of unemployment and phases of the electoral business cycle in the United
States. He concludes that the explanatory power of an equation for the unemployment
rate did not improve significantly for any administration by the adding a variable
indicating the phase of the electoral cycle. Similar results were reached by Laechler
(1978, 1982), Beck (1982), and Thompson and Zuck (1983). Haynes and Stone affirm
that formal evidence that economic outcomes follow a four-year electoral cycle in the
United States is weak. All these studies join together in refuting the idea of political
business cycles. I have explained the arguments that lead me to refute the idea of a
political business cycle in Mexico, now I present some formal work to prove this
point.
v. The Influence of Pressure Groups and the Absence of a Political Business
Cycle in Mexico
In this chapter I have argued that executive decision making is not influenced
by a political business cycle. But this dissertation’s overriding argument is that the
way in which the Mexican government spends money is procyclical and influenced by
certain pressure groups. Such groups, knowing fully well that the government has
money in its coffers, increase pressures to secure a share of those resources. Each
pressure group has a particular way of pursuing this goal. In this section, in order to
1 7 Dillon and Willet. In Willet ed. (1988).
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123
quantify the degree of influence that each pressure group may have exerted over the
government in swaying fiscal policy during the period under study, I assigned proxy-
variables for each interest group previously identified. I ran regressions against
government spending and to specific government spending categories. I also tested
whether there is evidence of the existence of a political business cycle in Mexico.
The model (GT) is the government’s total spending; (CAPFLI) is the capital
flight and the proxy variable assigned to the capitalist group, who benefits from
government contracts and subsidies in energy to mention a few; (INT) is the average
interest rate paid on the Mexican foreign debt each year; (STRIKTOT) is the total
number of labor strikes each year, a proxy variable for the workers group, who benefit
from more government employment, higher wages, social spending, and transfers;
(STRIKAG) is the number of strikes in the agricultural sector each year, a proxy
variable for the peasants, who benefit from social spending, transfers, agriculture
investment, and dislike price control on their products; (STRIKOIL) is number of
annual strikes in the oil industry, a proxy for the oil sector, who prefers higher
investment in their sector; (ELECT1) is a dummy variable that takes a value of 1 in an
election year, 0 otherwise; (ELECT2) is a dummy variable that takes a value of 1 in
the year previous to an election, 0 otherwise.
I chose capital flight as the proxy variable for capitalist groups, since it is well
known that this group takes money out of the country when it disagrees with
government policies, thereby pressuring for a policy reversal since Mexico depends to
a great extent on investment by the private sector. The interest rate on the external
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124
debt was especially important during the 1980’s since a huge share of the government
budget was devoted to interest payments. I use the number of annual labor strikes to
measure the degree of pressure exerted by workers to show they displeasure with
government policy, similarly, I take the number of strikes in the agricultural and oil
sectors to gauge the position of peasants and oil respectively, since this the only way
to measure their influence in fiscal policy. To test for the existence of a political
business cycle I create two dummy variables. One is to see if there is any evidence of
a political business cycle in the year of election, while the other probes if any artificial
economic stimulus started earlier than the election campaign so as to influence the
electorate in advance. I used HP-filtered data and tested different values of the
smoothing coefficient X; since the results do no vary significantly for the different
adjusted values, I take A,=10. Regressions were run with this time-series to test the
relationship between variables in influencing total government spending. Table IV.2
reports the 6-cyclicality coefficients and the statistical significance for the variables.
Table IV.2 Dependent Variable GT
Variables Model 1 Model 2 Model 3 Model 4
P-
coeff
significance
P-
coeff
significance
P-
coeff
significance
P-
coeff
significance
CAPFLI .026
* * *
.024
* * *
.021
** *
.021
* * *
INT 97.35
***
42.14
**
42.46
*
STRIKTOT .210
* * *
.281
**
STRIKAG -.956
N ote: * sig n ifica n t at 90% , ** sign ifica n t at 95% , * * * sig n ifica n t at 99%
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Table IV.2 Dependent Variable GT (continued)
Variables Model 5 Model 6 Model 7
P-coeff significance P-coeff significance P-coeff significance
CAPFLI .011
*
.010 .0003
INT 20.31 18.48 14.07
STRIKTOT 1.134
**
1.134
**
.436
**
STRIKAG -7.85
**
-7.789
*
-2.627
*
STRIKOIL -1.56
**
1.577
*
-0.380
*
ELECT1 10.004 111.08
ELECT2 135.16
Note: * significant at 90%, ** significant at 95%, *** significant at 99%
The coefficient values show that in the first four models capital flight
(CAPFLI) influenced total government spending starting at .026 and the effect
decreases to .021 as I add other variables. In all these models the degree of
significance is at the 99% level. This means that capital flight does affect
government’s behavior and the latter reacts by increasing public spending as it relates
to private sector demands. As I keep adding more variables the effect fades and
becomes insignificant. The interest rate that the government pays for its debt (INT)
becomes very significant at the start, but again as I add variables to the model, this
particular variable loses its significance. The effect starts at 97.35 in model 2, for
model 3 and 4 the effect is less than half at around 42. As interest rates increase, the
government had to increase its overall spending to maintain its debt service
obligations. The total number of strikes in the country (STRIKTOT) is significant for
all the models where it appears. This suggests that the pressure workers exert via
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strikes is reflected to some degree in government spending decisions. The number of
strikes by peasants (STRIKAG) is significant and negatively related to government
spending. I interpret this as the weak influence that this group exerts over the
government. The number of oil strikes (SRIKOIL) is significant and its sign changes,
becoming positive only when I add the (ELECT1) variable. The dummy variables
(ELECT1) and (ELECT2) are not significant in any model in this study, proving that
there is no political business cycle in Mexico.
In Table IV.3,1 change the dependent variable of the models to test the effects
that the independent variables have on the government’s current expenditures (GCU)
and on the fiscal deficit (FDY).
Table IV.3 Dependent Variables GCU and FDY
Variables Model 8 (GCU) Model 9 (FDY)
P-coeff P-stat P-coeff P-stat
CAPFLI .017
* * *
-.0001
INT 44.62
**
1.531
STRIKTOT .164
***
.007
**
STRIKAG -0.152
* * *
STRIKOIL
ELECT1 -3.513
**
ELECT2 59.45
Note: * significant at 90%, ** significant at 95%, *** significant at 99%
The variables CAPFLI, INT, and STRIKTOT are all significant and positive,
providing evidence that they affect government current expenditures. Therefore, the
way in which most interest groups pressure the government is effective. In the last
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127
model, I find that STRITKTOT, is significant and positively related to the fiscal
deficit, although it affects it very lightly. The variables STRIKAG and ELECT 1 are
significant and negatively related to the fiscal deficit. This means that the government
in Mexico tends to reduce its deficit in election years, this could be done either by
reducing spending or increasing taxes. Again we find no evidence for the existence of
a political business cycle.
The idea that budget deficits are higher before elections is based on the view
that lower taxes and higher spending and transfers might attract more votes for the
incumbent administration. Visible categories such as transfers may be more easily and
productively manipulated than others. As we can see in Figure IV.4, in Mexico
transfers show a procyclical trend, they move with the business cycle, but not with the
electoral cycle.
Figure IV.4 Net Total Transfers vs Real GDP
Net Total Transfers vs Real GDP
8000
7000
6000
350
300
250
§ 5000
200 — ♦—GDPR
= 4000
1 3000
150 — «— TRNT
2000
1000
0
100
50
0
1 3 5 7 9 1 1 13 15 17 19 21 23 25 27 29
Years
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128
vi. Conclusions
There is not much evidence of the existence of political business cycles in
countries other than Mexico. Several authors have found partisan common behavior
but not a political business cycle per se. In Mexico, my results confirm that pressure
groups do influence government spending, but they adjust their pressures along the
economic cycle, therefore compelling the government to follow a procyclical fiscal
policy. Since the economic cycle does not match the electoral cycle, my study sides
with that of Grier and Grier (2000) in arguing for the absence of a political business
cycle in Mexico.
Government spending does not increase notably in pre-election periods. If I
combine this with the rotating bandit argument, we find that it is perfectly rational for
the government and pressure groups to behave in this way. The incumbent president
prefers to be supported by the public during his term in office, and as his time horizon
shortens, his preference for this support also diminishes as he cannot be reelected, so
he has no incentive to increase spending to gain support at the end of his sexenio. To
gain the support of the public, the president spends the money when it is available,
yielding to the pressures exerted by the various pressure groups that I have modeled
here.
These pressure groups that exert the most effective pressure are private
investors, who use capital flight as their main tool. The strike strategy used by labor
was also effective, as there is evidence that the number of strikes does affect
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government spending. Somewhat surprising is the failure of peasant strikes to register
much impact on government spending, given the PRI’s historic ties with this sector. It
is well known that this group has been neglected for many years, and my findings
reflect the gap between PRI rhetoric and fiscal realities. The main reason for the oil
sector’s lack of influence over government spending might be its continued
dependence on the state as the owner and benefactor of this industry. This may also be
why the strike rates in this sector are so much lower, and the government has been
able to move aggressively against union graft and corruption.
Overall, these results are very positive and thus confirm my hypothesis
concerning the influence that each pressure group had on government spending and
the confirmation that, in the end, there has been no political business cycle in Mexico.
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130
V. An Overview of the Mexican Economy during the Stabilizing Development
i. Setting a Baseline for this Study
Although Mexico was ruled by the same party, the Institutional Revolutionary
Party (PRI) from 1929-2000, economic models implemented across the different
sexenios have varied widely. The pinnacle of economic policy making in Mexico was
the period known today as ‘Stabilizing Development’ based on sound monetary and
fiscal policies that led consistently to high growth from 1954-1970. The downside was
that over time, economic progress did not reach all the sectors of the population. This
led to political demands for a more distributive economic program that was called
‘Shared Development’, launched in 1970 with the election of Echeverria. But first, a
brief synthesis of the Mexican economy, and the Stabilizing Development model in
particular, which encompassed the years prior to the Echeverria administration (1970-
1976). The succession of Avila Camacho as president of Mexico in 1940 following the
administration of Lazaro Cardenas (1934-1940) marked the change from the
revolutionary era to successive governments basically controlled by civilians. It was a
change from populism to policies that were more beneficial to the private sector.
Miguel Aleman, Avila Camacho’s successor was the first president who was not a
“revolutionary”. In contrast to most other Latin American countries in the 20th
century, civilian government would be the only form of government that Mexico
experienced from this period on.
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131
In the economic arena, the period from 1940 to 1954 was characterized by
strong GDP growth averaging 5.7% annually until 1955, with an average yearly
inflation rate of 10.6% for the period. During these years the government followed a
policy of deficit financing of public expenditure in order to achieve growth. This
policy was a political response to pressing domestic demands from the population
after many years of hardship during the Revolution and the Great Depression of the
1930’s.
This resulted in a high rate of capital formation for the Mexican economy. The
savings rate was low during the period and the government’s challenge was to
mobilize finance for important infrastructure investment programs. Inflation was a
means for the government to transfer resources from private consumption into savings,
and thus offer profitable opportunities for investment. Wages lagged behind during the
period, as inflation outpaced cost-of-living raises. Public spending, especially in the
capital account, was directed toward increasing the profitability of private investment.
Private expenditures were bolstered by tax benefits, exemptions and subsidies, which
were used to promote the reinvestment of profits by the private sector. This situation
directly undermined fiscal policy goals geared toward increasing tax revenues. The
aims of these successive administrations were to accelerate industrial growth and to
promote capital accumulation.1
In 1952, however, as the Aleman administration was coming to an end, there
was a considerable rise in inflation and a substantial deficit in the current account. The
' Solis (1981).
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132
government was forced to reduce bank credit and constrict the money supply. This led
to a drop in growth and a reduction in public expenditures.
The severe contraction in public spending in 1952 was interpreted politically
by the private sector as a governmental effort to exclude selected businessmen that had
benefited from contracts for public works. The private sector launched protests that
forced the government to increase its expenditures in order to appease these groups.
Enriquez notes that as early as 1953, the Ruiz Cortines’ administration had
acknowledged the importance of controlling public expenditures in order to restrain
inflationary forces and transform the growth model followed up until then.2 The
priority of the Ruiz Cortines’ government was economic growth, just like the previous
two governments, but his administration also put special emphasis on controlling
inflation, since the administration saw it as a way to solve the social problems that
Mexico had faced since the Revolution.
In 1954, since the currency was overvalued, Mexico experienced a peso
devaluation that fixed the exchange rate at 12.50 pesos per dollar. This was the turning
point in economic policy making, launching the period of “Stabilizing Development”
characterized by high growth rates and low inflation. Labor unions manifested their
disagreement with the measure and as compensation, workers received a wage
increase. Because it became evident that economic growth with price instability was
unacceptable to labor, they organized strikes and manifestations to improve their
2 Enriquez. In Philip (1988).
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133
wages.3 Policies were then initiated so that labor would not bear the entire burden of
adjustment. The political effects of the immediate months after the devaluation of
1954 strengthened the conviction among public officials of the urgency of attaining
stronger control over public finances. Inflation had to be stopped, and hence the period
known as ‘Stabilizing Development’ started after this devaluation.
The spending spree by the Aleman administration had left the financial
condition of the government in a delicate state. In response to this, the Ruiz Cortines
administration created the permanent Investment Committee (the precursor of the
permanent Investment-Finance Commission that would regulate and authorize public
sector investments), which lasted from 1962 until 1976 and developed the
quinquennial investment program. This was the first effort to achieve stability, and the
1952-1958 period, witnessed a much stricter control over spending.4
Following the austerity measures of the first years in office of Ruiz Cortinez,
there was a major effort by his administration to expand public spending in the
economic sphere at the expense of administrative expenditures, emphasizing the
development of infrastructure. Social spending also increased in comparison to the
previous presidential term, reaching 16.4% of the total budget in 1958. Unfortunately,
this was not sufficient to compensate for the loss in real wages, causing labor unrest.
The recovery that the economy experienced during the 1956-1957 period was due to a
large extent to the expansion in public spending and to the increase in exports fostered
3 Solis (1981).
4 Enriquez. In Philip (1988), 20.
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134
by the devaluation of 1954. In that year economic expenditures reached a high of
57.9% of total spending.5
As Enriquez puts it, “the transformation in public finance that underlay the
process of stabilization was of great importance. The major burden of financing the
government debt was shifted from the central bank to the private banking system by
the use of a flexible reserve-requirement scheme under which the Bank of Mexico was
empowered not only to vary average reserve requirements on deposits of the banks but
also to impose reserve requirements on the average deposits of the banks and of up to
100% on the increases on deposits.”6 In this way the government had strong control of
the banking system and limited its maneuvering. Starting in 1956, the private banks
began to acquire larger quantities of government securities and to finance the public
sector deficit. This led to the strengthening of the bankers’ bargaining power vis-a-vis
the government.
The success of the economic policies taken by the Ruiz Cortines’
administration had a lot to do with its decision to not intervene in the private sector’s
activities. The response by the government to labor demands for wage increases was
to reduce inflation through increases in production. For example, half of public
expenditures under Ruiz Cortines went toward infrastructure meant to promote private
investment.7
5 Wilkie (1967).
6 Enriquez, Opcit., 21.
7 Newell and Rubio (1984).
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135
During these years the peasants and workers lost power to influence the
government and the middle classes (professors, professionals and students) were the
groups that made the largest gains, along with the private sector. As a result of the loss
of political power of labor, some independent labor movements had emerged by 1958.
This was a wake up call, confirming that the economic model had failed to encompass
a significant part of the population.
In terms of political institutions and practices, presidents Ruiz Cortines (1952-
1958) and Lopez Mateos (1958-1964) reinforced the centralization and the
bureaucratization that had started with Cardenas. But these administrations also
continued the rhythm of consolidation and innovation in policy-making that had been
the hallmark of Cardenas. Nevertheless, it was the goal of economic growth that
dominated public policy-making, and this meant a shift from deficit financing and the
advent of unprecedented economic stability, growth and very low inflation in Mexico.
When Lopez Mateos took office (1958-64) he inherited a delicate economic
situation, as domestic politics began to challenge the narrow goals of Stabilizing
Development. Several country-wide strikes had taken place and labor unions were
putting pressure on the government to change the prevailing policy focus, from capital
accumulation to social improvement for the working classes. Private investment had
declined and the stability of the peso was in jeopardy, as reserves in the Banco de
Mexico were hovering at very low levels. In response to the situation, the Lopez
Mateos administration decided to make monetary stability and economic growth the
flagships of the sexenio.
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136
The economic plan was based on a model of development that included private
investment, political stability, and social development, as well as the disbursement of
o
equal shares of economic, social, and administrative expenditures in the budget. The
administration considered this effort of giving equal weight to social and economic
expenditures as a way to appease the unrest that had emerged throughout the country
and demonstrate its good will to work towards a more just society.
Social expenditures reached new high points in the years 1962 and 1963, at
20.9% and 22.6% of public expenditures respectively. This was almost 38% higher
than the later years of the previous administration. Mexico reached its highest growth
level in 1964 when GDP grew at 11.9%. Lopez Mateos promoted a law for profit-
sharing with workers, established a system of guaranteed agricultural prices, and
continued the state’s expansion in the economy as he nationalized the electricity
industry and created forty-five new state enterprises.9
As the economy progressed, Mexico’s political system was again eclipsed.
Through the profit-sharing law, Lopez Mateos co-opted the most demanding sector,
the middle classes, and at the same time satisfied labor. Another move in the same
direction was to give opposition parties access to Congress through a very limited
proportional representation system.
Lopez Mateos chose Diaz Ordaz as his successor, someone who would
continue with his economic project of high growth and price stability. When Diaz
Ordaz came into power, the economic situation of the country was stable. He
x Ibid.
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137
continued the trends of his predecessor, retaining Ortiz Mena as his Secretary of
Finance and Rodrigo Gomez as governor of the Central Bank, two economically
conservative policy makers who knew the system and were the intellectual creators of
‘Stabilizing Development’. He left no doubt concerning his objectives, as from the
beginning he strengthened his alliance with the private sector, structured his policies to
promote private investment, and vowed to maintain strict political order.1 0
He worked for the continuation of balanced growth, although during the
sexenio the public sector experienced a rapid increase in its share of GDP. He
succeeded in bringing together the dissident wings of the PRI in an unprecedented
show of official party harmony, as Newell and Rubio point out. In order to achieve
this, he took advantage of a highly homogenous coalition of PRI politicians so as to
get rid of some lower-level officials who opposed stabilizing development.
In 1966 Diaz Ordaz strengthened the structure of labor control by creating the
Labor Congress, an umbrella organization that managed to incorporate all the major
labor confederations, and most of the major unions. Through this action, after 50 years
of struggles, control over labor was finally consolidated.1 1
Overall, the sexenios of Lopez Mateos and Diaz Ordaz successfully achieved
the goals set by economic policy makers in terms of high growth with price and
exchange rate stability. This was made easier by the confidence that Secretary of
Finance Antonio Ortiz Mena brought to the system during the two sexenios, teaming
9 Ibid.
1 0 Ibid.
1 1 Ibid.
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138
with Rodrigo Gomez as Governor of the Central Bank for almost twenty years. This
period continued the “Stabilizing Development” that was initiated under Ruiz
Cortines.
The decade of 1960 to 1970 showed some impressive numbers in the relevant
economic indicators. Real GDP grew at an average annual rate of 7% while inflation
held steady at a low rate of 3.5% per year. Income per capita also increased and
reached a level of $700 by 1970. The exchange rate remained fixed at a rate of 12.50
pesos per dollar for the entire decade. The industrial base expanded considerably and
private investment and public spending diversified into new economic areas, making it
possible to overcome the bottlenecks of earlier years. Mexico achieved high growth
rates and stability something that other Latin American countries were unable to
match, although the region for the most part posted high growth, inflation for some
countries was much higher. Table V .l shows a comparison of the economic
performance of selected Latin American economies.
Table V .l Growth and Stability in Latin America 1950-1970 (Average Growth)
Country GDP Growth
1950-1960
Inflation
1950-1960
GDP Growth
1960-1970
Inflation
1960-1970
Argentina 3.1 11.3 3.7 22.1
Brazil 6.8 7.1 5.8 44.1
Chile 4.0 22.1 4.3 26.9
Mexico 6.1 6.6 7.0 3.5
Venezuela 7.7 1.2 5.8 0.8
Source: Izquierdo (1995).
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Not everything was positive during this period, however. For example, severe
imbalances accompanied these achievements, and were themselves a product of the
government’s economic strategy. One of the main problems was the stagnation of the
agricultural sector, once the cornerstone of the Mexican economy. This was caused by
a substantial disinvestment in agriculture, in terms of both public and private
expenditures.
This situation led to pressures for further land redistribution, which would take
place in the 1970’s under the Echeverria administration. By the end of the 1960’s
agriculture was experiencing a severe crisis, growing at only 1.2% a year, compared to
the 6% average growth rate witnessed prior tol965. This led to the stagnation of
agricultural exports and a significant increase in grain imports that developed into a
major balance-of-payments problem in the early 1970’s. Table V.2 shows the
percentage of GDP and the annual growth rate of agriculture for the decade.
Table V.2 Agriculture Performance 1960-1970
Category 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970
% of GDP 17.1 16.7 16.5 16.0 15.5 14.9 14.4 13.7 13.0 12.5 12.2
Annual Growth 1.6 3.4 4.3 7.4 2.3 2.2 1.2 1.9 1.2 4.1
Imports* 1.9 2.3 6.8 32.8 4.3 5.8 8.9 15.9 10.1 10.6 14.5
Data from Izquierdo (1995).
* In million dollars.
Solis points out three factors as the main causes for this situation: insufficient
public investment spending, inadequate rural credit policies, and adverse changes in
relative prices. Throughout the 1950’s, the share of agriculture in public spending fell
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140
from a total of about one-fifth to less than one-tenth; and during the 1960’s the
stagnation of the sector was evident. After the 1954 devaluation, rediscounts to official
agricultural banks were discontinued. The only source of funds became the
government or government-guaranteed loans, secured from foreign banks. Thus,
agricultural credit as a share of total credit decreased from 15% in 1960 to 9% in 1970.
In the second half of the 1960’s agriculture’s relative prices worsened; agricultural
commodity prices rose by just 0.3% a year, while the cost of inputs increased by 1% a
year. The stability of prices of agricultural products reflects the fact that the price
support scheme was being used to maintain price stability rather than to increase
farmers’ income.1 2
The structure of the spending components of GDP showed some changes:
there was a relative decline in private consumption and exports; government
consumption increased; and gross fixed investment gained nearly three percentage
points, reaching 19% of GDP in 1970, a number much higher than the 12.8% peak
reached two decades before. Public expenditures during the period were determined in
such a way as to attain the desired growth of GDP without overheating the economy,
even though there were forces like a nationalist group of politicians and the workers
organizations continually pushing for an expansion of public spending.1 3
Solis explains that “in its fiscal policies, the government succeeded in keeping
spending under control and keeping its deficits from creating internal or external
instability. Nevertheless, the way in which public sector spending was outrunning
1 2 Solis (1981).
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141
revenues and that current account imports were growing faster than current account
exports, could only lead to problems in the future.”1 4
Public spending was systematically outgrowing both nominal GDP and public
sector revenues, with the result that public sector savings declined as a share of GDP
from .056 to .038. Reserve requirements were raised several times in order to
compensate for the deterioration of public sector finances and to allow the continued
use of the reserve ratio as a policy instrument. Notwithstanding, public spending
remained restricted to levels that did not require the issue of high-powered money and
it was directed towards the profitability of private investment. The elimination of
deficit financing and of inflation allowed the exchange rate to remain fixed during the
period.1 5
In addition to the stagnation of tax revenues, the decrease in savings from
public firms aggravated the budgetary problem. This was the result of a policy of
frozen state prices that led to the transfer of public utilities to the private sector.1 6 The
state was reluctant to change its policy regarding taxes and public prices; the
dependence of public expenditures on internal and external credit further aggravated
the situation due to the constraints on the state.
The debt problem began to surface early on, starting at US$1.3 billion in 1963,
and reaching a high of US$4 billion with a debt service ratio of 22.5% of current
account earnings in 1970. Between 1965 and 1970, public investment rose from .067%
1 3 Ibid.
1 4 Ibid., 31.
1 5 Enriquez, Opcit.
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142
to .073% of GDP, and savings in financial institutions increased from .044% to .057%
of GDP, but half of these were being channeled by the central bank to finance the
public sector. For a brief overview of public spending and foreign debt, see Table V.3.
In the mean time, as expanding industries greatly depended on the availability
of credit, the bankers progressively occupied a position of leadership within the
business community. This strengthened the political power of entrepreneurial groups
that could openly oppose or actually veto reformist initiatives put forward by the
government.1 7 The bankers also acquired important amounts of stock in the industrial
conglomerates, resulting in closer integration between the industrial and banking
sectors.
Table V.3 Mexico Public Spending and Public Debt 1960-1970
Year Public
Spending*
% o f Total
Spending
Foreign Debt
(In Billion Dollars)
% Increase of
Foreign Debt
1960 13.8 5.3 .81 25.3
1961 14.8 5.5 .93 20.9
1962 17.1 6.1 1.12 14.5
1963 19.2 6.4 1.31 16.8
1964 21.5 6.4 1.72 31.0
1965 22.3 6.2 1.80 4.9
1966 24.2 6.4 1.88 4.3
1967 25.8 6.4 2.17 15.3
1968 28.5 6.6 2.48 14.1
1969 29.7 6.5 2.94 18.5
1970 32.2 6.6 3.28 11.5
Data from Izquierdo (1995). * Billion pesos 1970.
1 6 Tello (1979).
1 7 See Enriquez, Opcit.
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143
An attempted tax reform failed in 1965 as a result of private sector opposition,
while the piecemeal changes that were introduced increased the regressiveness of the
tax structure. The tax reform had to wait until 1972, when the Echeverria government
would bring it up again for discussion.1 8 The effects of the failed attempts to achieve a
more just tax system and a better financial standing for the government as a result of
pressure from bankers and business groups would continue and provoke many other
problems for the government in years to come.
One of the issues during the years of the stabilizing development was the
deterioration of income distribution in Mexico. It has been argued that the low
tax/income ratio shows that fiscal policy has not been used as a redistributive device,
but instead has contributed to the further concentration of income. Organized labor
and middle-income families increased their share of national income, but the lower
income families were worse off. The repressive response of the government to the
general political dissatisfaction increased the pressure on a political and economic
system that was already the target of many critics for failing to open up and allow
increased political participation for social groups that demanded it.1 9
One of the biggest problems of the government during those years was its
inability to accommodate the expanding urban labor force despite the high rates of
growth experienced during the period. This was caused by the population’s growth
rate that almost reached 3.5% for the period that spanned 1950 to 1970. Rural
migration to urban centers reached unprecedented numbers during these years, due to
1 8 See Chapter VI for a discussion on the 1972 tax reform initiative.
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144
the problems in agriculture and the failure of the government to promote investment in
that sector.
Public investment increased but was not directed to the most profitable sectors
of the economy. The move from agriculture to heavy industry was in part caused by
the need to develop areas where private investment would not enter due to the low
profitability of the sectors and the high amounts of investment that it required.
During the Stabilizing Development, there were groups that were big winners
like the bankers’ group and the entrepreneurs, as capital formation was promoted
during the period. This situation led to the formation and consolidation of
conglomerates that included banks and diverse industrial and services firms that were
linked by their boards, sharing common interests and pushing for more tax benefits
and policies that increased their profits.
The labor movement made some gains in real wages and the law of profit
sharing was approved. At the same time it became more closely linked to the
government with the creation of the Labor Congress and the unconditional loyalty of
the leaders to the official party. The farmers were the biggest losers during those
years, as investment and support to agriculture decreased after 1965. Agriculture went
from being the most important sector of the economy to being forgotten and not even
capable of producing enough for domestic consumption.
The middle classes were a group that wanted more recognition by the
government and to increase its participation and representation in the economic and
1 9 Enriquez, Opcit.
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145
political decisions of the country. They were vocal and put pressure on the
government throughout the late 1950’s and 1960’s culminating with the 1968 student
movement a jarring train of events discussed below.
Before Echeverria’s administration, Mexico witnessed its best economic
performance in many years thanks to the efforts of the administrations of Ruiz
Cortines, Lopez Mateos and Diaz Ordaz. The events of 1968 prompted the new
administration of president Echeverria to declare the model as obsolete and the
country in need of change. After this, the Mexican economy became immersed in
severe crises, periods of high inflation and a lack of coherence in fiscal policy.
ii.- The Situation After 1968
The 1968 revolt was not a movement of the masses, the poor, the working
class, or the peasants. It was a movement where the middle classes challenged the
traditional establishment. It marked the beginning of the end of one of the most
successful economic periods in Mexican history, and made clear that the political
model followed for so long was no longer viable.
It started with a minor conflict between preparatory students that was
dismantled by grenadiers. This led to a series of student protests in July 1968 that was
exacerbated by police repression and spread quickly to UNAM (Universidad Nacional
Autonoma de Mexico), IPN (Instituto Politecnico Nacional) and to the provincial
universities. It served as a catalyst to attract wider anti-government protests by middle
class groups, such as doctors and teachers, who had led protests in previous years.
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146
During the following days, the government arrested many members of the Communist
Party and some students. As a response their schoolmates occupied more schools and
20
declared strikes.
The 1968 student movement was a problem that emerged due to the denial of
representation in the political process and political institutions, and the consequent
alienation of certain sectors of the population, especially the growing middle classes.
It was caused by the deterioration of the relations between the state and the
universities and the weakening of the cultural model, and the shift of the state to a role
blatantly favoring the upper classes.2 1 The political system faced a problem of its own
creation. Congress was not representing the interests of these sectors of the population,
the press was controlled by the government, and public administration was seen as
corrupt and inefficient:
The crisis of 1968 was triggered by a disorganized and heterogeneous student
movement that expressed unsophisticated political conceptions (socialism,
representative democracy, and Cardenismo were continually presented as
being one and the same), but implicitly demanded increased means of effective
political participation. It was not difficult for the students to find an almost
absolute incongruence between the democratic rhetoric of the system and its
reality; they expressed their individualistic middle-class values by refusing to
be co-opted through the traditional party mechanisms. The student movement
specifically challenged the president’s policies in a country where tradition has
always impeded precisely to challenge the president. Perceiving the movement
as a threat against stability and social order, the president crushed it violently.2 2
As the protests continued, the Olympic Games scheduled to begin on October
12 created additional pressure and complications. The students softened their position,
2 0 Krauze (1998).
2 1 Zermeno (1990).
22 Newell and Rubio (1984), 24.
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147
but Diaz Ordaz, by nature a defender of the institutional order, was no negotiator. He
refused to make concessions to student demands, and the demonstrations intensified.
This culminated in the massive demonstration of October 2, when between five to ten
thousand people met in Mexico City’s Plaza of Tlatelolco to continue with the
protests. It ended with the confrontation of protesters with the police and army, and
resulted in the killing and disappearance of hundreds of students.
The way in which the government dealt with the movement caused
disagreement among its members leading to a split in the PRI political “family”,
something that had not happened for years. The difference of ideas spread to other
areas of policy-making. As Newell and Rubio argue, the political system itself was
one of the major victims of the situation. It went from being an extraordinarily
competent system for conflict management and consensus building to one increasingly
polarized and unable to solve its own structural dilemmas.
The impact of the 1968 student movement was very important, making it clear
that the system was not immune to social unrest. It also destroyed the legitimacy of
authoritarian forms and leaders, stimulating groups in various sectors to challenge the
quasi-monolithic system of political control.2 3 The demands included, besides political
reforms, the improvement of the economic and social welfare of the population. The
crushing of the student movement bolstered the position of Echeverria with President
Diaz Ordaz, who as the Interior Minister that carried out the President’s orders with
complete and unquestioning loyalty emerged as the favored candidate for the
2 3 Newell and Rubio (1984).
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148
presidency. Ironically this led to the election of a president that shifted the logic and
functioning of Mexican politics on to a quite different course.2 4
iii. Conclusion
Stabilizing Development brought to Mexico more than fifteen years of
economic prosperity, where the country’s GDP growth was on average 7%. Its
currency was stable and remained at 12.50 pesos per dollar. The country experienced a
substantial change in its economic activities and it turned from being an agricultural
economy to a more industrialized one. The strategy of import substitution played a
very important role in this change. At the end of the period agriculture was in a deep
crisis since investment had shifted to manufacturers and agricultural prices had
remained fixed as a subsidy to the industrial sector. Labor and the middle classes were
also clamoring for more participation in the decision-making process. This led to the
1968 movement, the later designation of Echeverria as president, and his subsequent
search for a new development strategy, one he called ‘Shared Development’.
Ironically, the economic growth and stability achieved during this period did
not reach all the sectors of the population. The end of the Diaz Ordaz administration
marked the beginning of a new era for the Mexican economy, a period that brought
much more economic instability and new challenges for policymakers. Sound
economic policies and cohesion between cabinet members would become vague
2 4 Bailey (1988).
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149
memories from Stabilizing Development. Finally Table V.4 presents some of the
macroeconomic and fiscal policy indicators for the Diaz Ordaz sexenio.
Table V.4 Macroeconomic and Fiscal Policy Indicators 1965-
Category 1965 1966 1967 1968 1969 1970
GDP* 252.0 280.1 306.3 339.1 374.9 418.7
GDP Growth 6.5 6.2 5.9 7.3 5.8 6.6
Public Investment 5.2 5.5 6.9 6.9 7.0 7.0
Public Saving 5.6 4.7 4.4 4.3 3.4 3.8
Revenues* 20.1 21.7 22.7 27.3 30.2 33.8
Spending* 28.2 26.3 28.0 32.6 39.5 40.2
Public Sector Deficit 4.4 2.5 3.0 4.7 4.5 2.9
Government Consumption* 17.7 20.4 22.5 25.9 28.8 32.6
970
Source: Solis (1981).
Note: % o f GDP unless otherwise specified. * billions o f pesos o f 1960.
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150
VI. Populist Policy and Increasing Instability Under Echeverria (1970-1976)
i. Losing Control of Fiscal Spending
By 1970, when Echeverria became president, several trends had placed strains
on the financial system. Increasing credit requirements in an economy that kept
growing at a high pace with a low level of taxation forced the public sector to finance
its deficit through the domestic banking system. This occurred via a continuous
expansion of its liabilities, which represented high budgetary costs in the form of
interest payments.
Although GDP grew at an annual average of 6.5% in 1970, the financial
authorities were concerned about the growing current account deficit and rising
inflation.1 In 1970 Mexico ran a current account deficit of US$908.8 million, almost
doubling that registered the year before. Inflation also showed a sharp increase,
recording a 1.1% rise in January 1971 alone, a hint of the stabilization challenge on
the horizon.
Luis Echverria became the seventh consecutive presidential candidate to be
hand-picked by the ruling PRI party without incident, controversy or setback. Despite
this complacent start, the Echeverria period would prove to be one of the most
problematic and costly periods in recent Mexican economic history. Diaz Ordaz chose
Echeverria to succeed him due to the loyalty he demonstrated to the president during
the difficult moments of the 1968 student protests, and to the lack of alternatives at
1 Solis (1981).
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151
this critical time, as Diaz Ordaz later confessed. The 1968 events had eliminated other
possible competitors for presidential selection, such as Corona del Rosal, Martinez
Manatou and Ortiz Mena, because Diaz Ordaz saw them as less loyal than his interior
minister.2
The business class of the country seemed satisfied with the designation of Luis
Echeverria as presidential candidate for the PRI. Despite his leftist rhetoric, he
established good relations with the head of the Monterrey group, Eugenio Garza Sada,
and with the director of COPARMEX, Roberto Guajardo. Echeverria maintained a
low fiscal burden for business and instead borrowed aggressively on external capital
markets as a means to finance the growing demand for public spending. These tactics
kept the peace between the government and the private sector for the first three years
of the sexenio, even though the inclusion of nationalist and progressive groups in the
Echeverria team marked his term with the unmistakable seal of a social-democratic
government.3
Echeverria’s presidential campaign was characterized by his efforts to open up
communication lines with those social sectors that had launched the ‘68 movement
and to bring students and intellectuals to an understanding with the government. He
used the term ‘apertura’ (openness) to promote negotiation and dialogue, a supposedly
new political style that was an alternative to the previous repressive acts of the
government. New proposals from different sectors of the population were considered,
debated and incorporated into his administration’s program. Different members of the
2 Castaneda (2000).
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152
private sector were invited to accompany the candidate on the campaign trail. They
were listened to, and the candidate seemed quite willing to comply with their
requests.4
Despite these conciliatory gestures, Echeverria could not prevent a major
political crisis, due to a general lack of consensus and an economic model badly in
need of change.5 Echeverria’s government was also concerned about growing guerrilla
activity in the countryside. In response to these political and social pressures the
president increased public spending, including social spending, and attempted to
strengthen the government’s control of the economy by increasing the number of state
enterprises. He believed that an active state, through an increase in expenditures,
public investment, and regulation, could clear up the development bottlenecks and
improve living standards.6 He saw it as the duty of the state to fill the gaps left by
private investment, and in turn state sponsorship would help Mexico to become
economically independent and at the same time create the jobs needed for the growing
population.
Since the previous administration had lost legitimacy, Echeverria formed his
new administration with the objective of reestablishing it. His first gesture was to
revive the major objectives of the post-revolutionary consensus of economic
development and social justice, in contrast to the single-minded goal of achieving
1 Basanez (1990).
4 See Tello (1979).
s As former minister o f the interior, he had been the government official that was most closely linked to
the termination of the student conflict.
6 Lustig (1998). See also Dornbush and Edwards eds. (1991).
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153
economic stability and growth delineated by previous administrations. Echeverria
sought to reform both the political system and the economy, so as to allow for more
authentic participation in the political system, and to achieve greater credibility with
the electorate.7 The private sector was dubious of these new policies as the ‘stabilizing
development’ model had granted them more benefits and profits than any previous
stage of Mexican economic history.
Nevertheless, Echeverria and his team sought private sector approval and in
doing so generated a two-stage economic plan: The first stage was one in which the
government would limit the growth of imports, check rising prices, introduce fiscal
measures leading to fairer taxes on profits and interest from securities, and promote
exports. The second stage was directed towards reaching high levels of economic
growth, as in the previous decade. It would be based on an accelerated
industrialization plan, more dynamic investments in manufacturing and tourism, the
devotion of greater resources to agriculture, and the construction of housing for the
popular sectors.
As Solis8 describes it, the new cabinet was structured in such a way as to
balance ideological positions by incorporating outsiders into the governing coalition. It
also showed a younger look. The key economic ministries at this time included: 1) the
Treasury Secretariat (SHCP), endowed with the formal powers of taxing, executing
debt operations, controlling public sector spending and overseeing all national credit
institutions, including NAFINSA and the central bank; 2) the Secretariat of Industry
7 See Newell and Rubio (1984).
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and Commerce (SIC), responsible for the administration of import licenses,
manufacturing programs, and price controls; 3) the Secretariat of National Properties
(SEPANAL), in charge of supervising the operations of government-owned
corporations, checking on the practices of the public sector and supervising mining
activities; and, 4) the Secretariat of the Presidency (SP), with responsibility for
coordinating planning sector tasks and handling the public investment budget. See
Table VI. 1 for an overview of the cabinet.
Table VI. 1 Main Figures of the Echeverria Administration
Person Position
Hugo Cervantes del Rio Minister of the Presidency
Ernesto Fernandez Hurtado Governor of the Central Bank
Horacio Flores de la Pena Minister of SEPANAL
Carlos Galvez Betancourt Director of IMSS
Augusto Gomez Villanueva Minister of Agrarian Reform
Jose Lopez Portillo Director of CFE
Minister of SHCP after Margain
Hugo Margain Minister of SHCP
Mario Moya Palencia Minister of the Interior
Porfirio Munoz Ledo Minister of Labor
Carlos Torres Manzo Minister of Commerce
Though overlapping in their functions, each of these secretariats had its own
style in terms of the political profile of the people that it attracted. For example, the
Treasury was typically headed by a monetarist or fairly conservative economist. The
8 Solis (1981).
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155
Commerce Secretariat was frequently headed by an economist of a more structuralist
or progressive persuasion. Ostensibly, the economic nationalism and import-
substitution bias of Commerce counterbalanced the more stabilization-oriented and
cautious stance of the Treasury. Traditionally, there was a good deal of political
bickering between the two Secretariats. In contrast, the interests of the Ministry of the
Presidency and the Ministry of National Patrimony were more complementary. The
head of the economic section of Ministry of the presidency was usually a close and
trusted political associate of the executive, while the National Properties Secretary
traditionally mediated between different domestic interests as he supervised the
administration of national enterprises.9
Echeverria followed this general pattern when designating his cabinet, except
for the National Properties minister. Here, he named Horacio Flores de la Pena, a blunt
and outspoken economist, as well as a self-proclaimed leftist. From the beginning,
Flores de la Pena criticized the private sector, openly disagreed with the other
members of the economic cabinet on various issues, and warned that the government
would be willing to step in to remove bottlenecks and prevent rent-seeking abuses.
This stance became problematic for the entire administration. The Treasury minister,
Hugo B. Margain, more easily won the private sector’s confidence due to his moderate
opinions, his inclination to improve tax collection practices instead of instituting
drastic reforms, his willingness of adjusting a rapidly appreciating exchange rate
parity, and avoidance of radical policy reforms.
9 Solis (1981).
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But despite their efforts, neither Margain nor the new Central Bank governor
Fernandez Hurtado, were able to exert the comprehensive control over Mexico’s
finances of their predecessors Ortiz Mena and Gomez. De la Pena prevailed in causing
the government to change from the more fiscally conservative path of previous
administrations, which could be financed without resorting to an expansionist
monetary policy, toward a more profligate fiscal policy that implied a steep rise in the
government’s deficit and required a more active and expansionist monetary policy.1 0
Despite the growing instability, the government used the growth of state
employment to co-opt opposition groups, such as former members of the 1968 student
movement, as well as representatives of farmers, workers and other sectors that had
become alienated. This enabled Echeverria to consolidate a support base different
from that of the PRI’s traditional political class, which in many ways was at odds with
this new middle class political force. The federal bureaucracy had for years served
select client groups, mainly from the private sector, and controlled specific sectors of
the population such as labor, peasants and more recently this newly emerging middle
class. Although state expansion exploded under Echeverria, the bureaucracy was
inefficient ill-prepared to deliver on these new demands. Coordination grew
increasingly hard, and tensions between politicos and tecnicos increased as they
differed on how to appease the political demands of a rising middle class.1 1 This is
evident, for example, in the conflicting policy approaches that emerged between
public spending on education and agriculture.
1 0 Newell and Rubio (1984).
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From the start of his administration, Echeverria showed a willingness to
increase public spending on education, obviously a lay concern to the middle class.
Beginning in 1971, there was a substantial increase in jobs in education; a large
number of new schools were constructed and the subsidies for public universities
markedly increased.1 2 Education expenditures for 1971 increased by almost 10% and
amounted to an unprecedented 1.91% of GDP. Echeverria’s goal was to compensate
for the educational deficiencies that had accumulated during the stabilizing
development period, the idea being to improve income distribution and the
performance of the business sector.
As the administration focused its attention in other problems, the agriculture
sector development was neglected. The Ministry of Agriculture had limited functions
and the issues affecting the sector were fulfilled by numerous agencies that lacked
coordination.1 3 This ministry was headed by an old and experienced politician, who
lacked the economic and political support to improve the performance of the sector.
Agriculture was a sector deeply immersed in problems, as explained above, and was
reflected in the fact that the country was becoming a large importer of grains. In its
effort to make Mexico a manufacturing economy, Echeverria denied the resources to
agriculture, the sector that had once carried the weight of the Mexican economy.
Peasants became desperate with the lack of credit and low guarantee prices for their
products. This situation propelled the big wave of immigration from the rural areas to
1 1 Bailey (1988), 21.
1 2 Basanez (1990).
1 3 See Solis (1981).
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158
the cities and the United States, as farmers left their lands in search of better
opportunities. This phenomenon affected the middle class as labor supply increased
and wages were pressured downward.
ii. 1971-1972 Economic Restraint and the Failure of Tax Reform
During his first year as head of the government Echeverria made orthodox
economic decisions that led to a short-term downturn in economic activity via a
fiscally conservative budget. One of the first economic decisions of the administration
was to restore equilibrium in the external sector and to correct several economically
and politically significant regulated prices. Sugar was the most important price hike in
this first stage, as its price increased by 48%.1 4 The administration favored monetary
restraints over price controls and argued that the maintenance of exchange rate parity
was a priority, both for the sake of economic stability and because a fixed exchange
rate maintained purchasing for the working and middle classes.
The financial authorities recommended that economic policy be geared toward
reducing the current account deficit in the balance of payments and quelling inflation.
As both were monetary targets, monetary restraint would have been the principal
means for achieving these goals. The absence of a domestic bond market to buffer the
monetary and real effects of government spending was crucial here. As a result; public
spending was instead used as a monetary tool and budgeted at a very low real level in
order to slow down the economy and fight inflation. Thus, a real variable was
1 4 Newell and Rubio (1984).
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relegated to the role of an intermediate instrument for achieving the monetary
objectives of price and balance of payments stability. The public investment budget
went from a budgeted amount of 30.3 billion pesos to an actual level of 29.2 billion
pesos in 1970 and in 1971 from a budgeted amount of 27.5 billion pesos to an actual
level of 22.6 billion pesos, in order to smooth the transition.1 5 See Tables VI.2 and
VI.3 for an overview of public spending for the period 1970-1976.
Table VI.2 Behavior of Public Expenditures 1970-1976
Year Social
Spending
Economic
Spending
Administrative
Spending
Parastatal
Sector
Federal
Government
1970 40.3 84 58.3 94.6 88.0
1971 43.8 90.9 60.7 105.6 90.0
1972 49.3 122.2 41.5 94.6 118.3
1973 51.7 148.5 47.2 115.7 131.7
1974 64.2 165.2 52.6 138.6 143.4
1975 78.8 229 66 186.6 187.4
1976 89.2 186 84.8 169.3 190.6
Source: Newell and Rubio (1984).
Note: Constant Pesos of 1975
1 5 Solis (1981), 47-48.
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Table IV.3 Composition of Public Expenditures by Sector 1970-1976
Year Economic Social Administrative Total Spending*
1970 46 22 32 10.36
1971 47 22 31 9.90
1972 57 23 20 12.28
1973 60 21 19 13.47
1974 59 23 18 13.99
1975 61 21 18 16.98
1976 52 25 23 15.99
Average 71-76 56 23 21 13.76
Source: Newell and Rubio (1984).
Note: % o f total spending, * % of GDP
This policy resulted in a decisive decline in real public spending relative to
what was planned for the government’s sectoral allocations. In other words,
Echeverria’s stated priorities were sacrificed in the very beginning of his presidential
term, with the budget now the primary tool for monetary restraint. The Treasury
became isolated politically, as it slashed the programs of the new Secretaries. The
fiscal discipline shown in these early months of the administration was in line with the
policies favored the bankers’ group, while other groups were affected by the spending
cuts. The GDP growth rate declined from 6.5% in 1970 to 3.8% in 1971. The
unemployment rate increased, as did the inflation rate, while public revenues did not
recover and the current account deficit barely declined. In this way the Echeverria
administration right from the start clearly followed a procyclical fiscal policy, as the
economy was undergoing a recession, the government set to cut public spending,
instead of reactivating the economy via government expenditures.
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The administration’s first disagreement with the private sector came on
December 15, 1970 when a presidential initiative to reform existing tax laws and levy
some new revenues was sent to congress without being discussed beforehand with the
private sector. Although the modifications were not substantial and did not affect in a
major way the current tax structure,1 6 the incident invoked strong criticisms by the
private sector and led to mutual accusations between government officials and the
business community. The most vocal critic was COPARMEX leader Roberto
Guajardo, who blamed the government for not discussing the issue with the business
community prior to sending it to congress for debate. In essence, the criticism was not
against the policy per se, but rather against the failure to communicate with the
business community. With the new government, the old PRI practice of working out
■ I n
economic policy reforms with the business sector had come to an end.
On January 28, 1971 COPARMEX made some policy recommendations to the
Echeverria administration. It asked that any new tax measures adopted by the
government be postponed or sequenced in order to avoid further inflationary
pressures. Business leaders also complained about the continued lack of consultation
from the government in drawing up a New Law of Agrarian Reform. At the same
time, they started their adamant opposition to the imposition of price controls and the
increasing intervention of the state in the economy. Echeverria responded with equally
harsh criticism, suggesting that Guajardo should reprimand some COPARMEX
1 6 Tello (1979), 44-45. For example, the government imposed a surtax on luxury goods that was later
repealed in September 1971.
1 7 See Ibid.
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162
members for selling their firms to foreigners instead of lambasting the government
with unfair charges.1 8
Echeverria then showed his sympathy for the national populist ideology and
made several unsuccessful attempts to increase taxes on the wealthy. Hugo Margain
tried to play an intermediary role between the national populists and the big capital
group, mainly the bankers, during his tenure at the Finance Ministry. In response to
protests over the proposed tax reform, Margain consulted with and reassured private
sector members of the bankers’ group, arguing that Mexico’s corporate tax burden was
among the lowest in the world, and that modifying the tax structure would be
necessary to increase domestic savings. He even invited the private sector to
participate in identifying those items that would be taxed as luxuries.1 9
By mid-1971, a slump in the economy had already begun as a result of the cut
in public spending and the decline in private investment. Financial authorities like the
Ministry of Treasury continued to reassure Echeverria that economic conditions were
near normal and that GDP growth would not dip under 5%. In order to spur economic
activity the Treasury proposed a new budget reform, with public investment pared to
30 billion pesos. No major changes in taxes were proposed, except for a minor
adjustment of taxing the interest gains on capital. But the Ministry of the Presidency
wanted more spending, with public investment at 32 billion pesos, and it pushed for
deeper tax reform.2 0 The decline of the growth rate in 1971 was used as justification
1 8 See Ibid., 45.
1 9 Maxfield (1990).
2 ( 1 Solis (1981).
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for increased spending by the Secretary of National Patrimony and other entities
whose budgets had been cut the year before.
When the economy did not show any signs of recovery, Echeverria increased
the role of the government as growth promoter, largely by relying on deficit financing,
therefore switching to a countercyclical fiscal policy. Table VI.4 shows the evolution
of the fiscal deficit during the sexenio. He adopted this trend late in 1971, accepting
arguments like that of Flores de la Pena to the effect that stabilizing development was
basically outdated. Their argument was that the government needed to compensate for
the structural deficiencies of the previous economic model, especially concerning
income inequality and the performance of the business sector, i.e., their lack of interest
of investing in certain sectors of the economy that the government thought were
21
priorities and their reluctance to accept any reasonable tax reform.
As GNP per capita decreased in 1971, private savings continued to increase.
The financial institutions had accumulated excess reserves in the amount of almost 2.8
billion pesos, which they had deposited in the central bank. Since the central bank paid
a high interest rate for legal reserves relative to the interest rate being paid on loans,
the banks accumulated more than a normal amount of financial certificates, leading to
22
the sterilization of resources. Simultaneously, the private sector held back on
investing as they waited for a clearer idea of the policy bent of the Echeverria sexenio.
When the government realized that the banking system had accumulated excess
reserve funds compared to its legal requirements, it increased public expenditures.
2 1 Bailey (1988), 21.
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164
This reduced the credibility of the monetary authorities, as even the President saw
them as weak and not committed to economic stability and pursuing his development
goals. So the advice of the group of structuralists headed by the National Property
Minister Flores de la Pena took center stage. And this, of course, was the very moment
when oil prices skyrocketed and the world economy allowed for easy access to surplus
• 23
credit now building up in international markets.
Table VIA Real Fiscal Deficit 1970-1976
Year Fed. Gov.
Revenues
Fed. Gov.
Expenditures
Fed.
Gov.
Deficit
Parastatal
Sect. Rev.
Parastatal
Sect.
Expenditure
Parastatal
Sect. Def.
Deficit
as % of
GDP
1970 95.3 94.6 -.7
1971 76.4 83.4 7.0 105.8 105.6 -.2 .9
1972 91.2 118.3 27.1 87.9 94.6 6.7 4.04
1973 94.1 131.7 37.6 105.8 115.7 9.9 5.6
1974 105.3 143.4 38.1 122.1 138.6 18.5 5.7
1975 133.4 187.4 54.0 147.7 186.6 38.9 8.7
1976 137.8 190.6 52.8 139.5 169.3 29.8 7.5
Source: Newell and Rubio (1984).
Note: Constant Pesos o f 1975
So, 1971 having been a year of adjustment, the federal government’s total
expenditures declined 4.4% with respect to the previous year. This included reductions
in government primary expenditures, interest expenditures, public investment, and
capital expenditures. The only public spending categories that showed increases were
2 2 See Solis (1981) for a further explanation on these financial certificates.
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165
the government’s current expenditures and social expenditures in subcategories like
education and health. This government behavior strongly supports my argument
concerning Mexico’s procyclical fiscal policy. Even though the economy was in a
recession, the government cut public spending instead of seeking to smooth the
economic cycle as economic theory recommends.
Early in 1972, the government recognized that the situation was more delicate
than previously believed. Targeted growth rates were not being met in any sector of
the economy. In response to this situation the government focused on the second stage
of its development plan, the achievement of economic growth levels at least at the
rates of previous years. Government policy now focused on rapid industrialization, the
promotion of manufactured exports, and tourism. More resources were committed to
agricultural development and the construction of housing for the popular sectors.2 4
Thus 1972, which was viewed as the year for serious fiscal reform and
increasing the collection of taxes on the revenue side, also became the year in which
fiscal innovations were introduced on the expenditure side. The investment budget
approved by Congress was 10.7 percent above the 1970 level, at 33.5 billion pesos.
Actual public spending was almost 35 billion pesos. This was due to a series of
increases in both current expenditures and investment. Public expenditures rose from
8.9 billion pesos in 1971 to 12 billion pesos in 1972 or to 34% of GDP, a 16.1% hike
over the previous year. By the end of 1972 government agencies had exceeded their
2 3 Basanez (1990). During this time o f excess deposits, international banks were willing to lend money
at low interest rates and without a careful study o f the projects that would be undertaken with the credit.
2 4 Solis (1981).
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166
budgeted investment by a total of 7.3 billion pesos. This was in response to the
existence of excess reserves held by banks and the poor performance of growth in the
previous year. The final budget for 1972 was 20.6% higher than that originally
authorized by the Congress. These cost overruns were possible via special
authorizations of expenditures issued directly from the president’s office. This is a
clear example of how Congress was unable to limit the president’s will. If the
executive wanted to spend more, no one was able to stop him.
When the Secretary of National Property advocated loosening monetary and
fiscal policy, emergency employment programs were planned for immediate
implementation. In this way the administration’s first stage of consolidation, which
included fiscal and monetary adjustments, was declared completed even though the
government accounts showed severe imbalances and it was clear that monetary policy
had lost its tightness. The economy rebounded sharply during that year, and GDP grew
at a rate of 7.2%.2 5 This paved the way for the launching of a second stage of the
national economic policy.
Despite the apparent recovery, the loss of budget discipline was very
important, as Solis describes,
Budget control was fractured, as spending programs were directly promoted by
the President, and the Budgetary Office of the Treasury had to reduce its grip
on the expenditure process. The cost of public investment varied, because
competitive bidding by contractors was eliminated in order to avoid the delays
associated with such a procedure. Special authorizations were granted above
the initial budgeted level.2 6
2 5 Telio (1979).
2 6 Solis, 1981, p 68.
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167
The government efforts at economic reactivation in 1972 did appease the
working and middle classes, who rightfully demanded higher growth and the creation
of new jobs. However, the private sector was still on the fence, uncertain of the path
the economy would take. Investors preferred to wait, and while doing so, continued to
express the need for a stable economy and a predictable policy framework. In that
year almost every public spending category increased; for example, federal
government expenditures rose 24% over the previous year, government investment
increased 45%, and capital expenditures increased 42%. Again the government
followed a procyclical fiscal policy as the economy was growing at a faster pace and
public spending fueled it, accentuating the economic recovery.
By the end of 1972 government agencies had 7.3 billion pesos in approved and
unspent investment authorizations. This led to an increase in actual public spending of
43% from 1972 to 1973. Public investment spending more than doubled during these
two years, from 22.5 billion in 1971 to 49.8 billion in 1973.
Needless to say this spending spree of 1972 occurred amidst a lack of
monetary resources, leaving the Central Bank no other recourse but to print more
money. The money supply began increasing in October 1971, from 5.7% that month to
12.6% in May 1972. Reserve requirements rose to 15% by the end of June 1972. This
loose monetary policy encouraged an increase in lending by the private banks at
reduced interest rates. Through the Banco de Mexico and the private banks funds were
channeled to the high priority activities signaled by the government.2 7
27 Solis (1981).
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168
The president was severely criticized for this recklessness by the business
associations, who used the visit of the socialist Chilean president, Salvador Allende as
an excuse to open fire on Echeverria. At the same time, the budget and the fiscal
modifications that the administration intended were being discussed in Congress along
• • 28
with new Federal Electoral Law, a reform intended to appease the opposition. Later
that year the proposal to reform the Income Tax Law in order to eliminate completely
the anonymity of the owners of fixed rate stocks and stockholders was defeated.
Instead, another bill was approved that differed greatly from the original proposal.
Tellingly, the pressure that business put on the government through capital flight
played an important role in defeating the more serious effort at tax reform.
At this time, there was a growing consensus among cabinet members that the
taxes on capital earnings were too low, benefiting the rich, and that this was a result of
poorly conceived tax schedules and inefficient tax administration. Therefore, another
major fiscal reform was planned and discussed, which was to have increased revenues
through a one percent rise in indirect taxes on the accumulation of dividends income,
and a higher tax on the income of financial instruments.2 9 Table VI.5 shows a
summary of government revenues for the sexenio.
2 H Tello (1979).
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169
Table IV.5 Federal Government Revenues 1970-1978
Year Total
Effective
Revenues
Current
Revenues
Tax
Revenues
Total
Income
Taxes
Non-Tax
Revenues
Income
From
Capital
1970 33,868.2 33,044.4 29,792.1 15,478.4 3,252.3 823.8
1971 36,529.9 35,744.4 32,553.9 16,841.6 3,190.9 785.1
1972 42,336.3 41,665.6 37,836.2 20,818.2 3,829.4 670.7
1973 53,822.3 52,217.0 47,979.4 26,083.1 4,237.6 1,605.3
1974 72,893.2 71,995.6 67,223.7 35,571.4 4,771.9 897.6
1975 103,551.4 102,299.5 95,022.8 47,802.3 7,276.7 1,251.9
1976 136,612.0 134,387.0 124,500.0 64,599.0 9,887.0 2,225.0
1977 194,607.0 191,660.0 180,473.0 92,016.0 11,187.0 2,947.0
1978 255,174.0 253,670.0 240,236.0 129,998.0 13,434.0 1,504.0
Source: Solis (1981).
Note: Current Millions of Pesos
The tax reform proposal gained strength as it became clear that the budget
deficit situation was getting out of hand. The effects of the increase in public spending
were so large and sudden, that they had an immediate monetary effect, as explained
above. The Treasury, led by Margain, was considering a change in the rate of the
financial transactions tax (from 3% to 4%), as the main revenue proposal for the year,
along with increases in fuel prices and power rates that had remained unchanged
during the previous decade. The increase in fuel prices would have represented a
substantial boost in public sector revenues. But Echeverria did not support the policies
suggested by Margain. Since Flores de la Pena was a promoter of government
expansion and subsidies, he sabotaged Margain’s proposal and suggested that the
2 9 Newell and Rubio (1984).
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Finance Ministry was evincing a “lack of zeal for tax reform”, since Flores de la Pena
wanted a more radical reform. A second proposal for reform emerged, which included
a reform of the income tax, spending surtaxes, and a wealth tax, which appealed more
30
to the President and to Flores de la Pena.
The taxing of interest yielded by financial assets was the controversial point of
the new proposal. The Secretariat of the Presidency supported the full reform position,
the Central Bank governor Ernesto Fenandez Hurtado opposed it, and the Treasury
supported the elimination of bearer bonds and shares, but was against taxing interests
and dividends from accumulation. In the end, the Treasury’s position was followed
and the reform was sent to Congress together with a Law on Foreign Investment.3 1
The government tried to get favorable press coverage for the tax proposal and
to persuade the private sector about the necessity of the tax reform by the end of 1972.
In keeping with the tradition of private sector consultation in policy formulation,
Margain held a series of meetings at his home to discuss the proposed tax reform with
leaders of the business community, but they were completely against the tax proposal
and opposed it altogether.3 2 “They saw the bill as a first step leading to foreign
exchange controls and argued that tax administration could be improved by measures
that would not hurt investor’s confidence as the proposed measures would.”3 3 This
reaction by the private sector was expected and drew harsh criticism from some
3 0 See Appendix 2 for a summary o f the main features of this reform.
3 1 Solis (1981), 74.
3 2 Maxfield (1990), 91.
3 3 Solis (1981), 76.
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171
sectors of the government, especially the Secretary of National Patrimony. Politicians
from the left were the most vocal in launching this offensive.
Margain defended the need for tax reform on the grounds that it would prevent
a worse evil and the scourge of the bankers’group: inflation. The private sector, while
still reluctant, ran out of arguments and withdrew from discussion, warning at the
same time of unforeseen dangers.3 4 Some private sector leaders understood the
government’s position, but they remained loyal to their sectoral interests and were
pressured by their business associations (CONCAMIN, CANACINTRA, the Bankers
Association and the Chamber of Commerce) to resist the measures. They argued that
the reform would precipitate capital flight and force a politically destabilizing peso
devaluation.
Before the bill could be sent to Congress, the CMHN intervened, arguing
forcefully with Echeverria in private against it. Later, Margain appeared before the
congress to explain that several small changes in tax rates would substitute for the
larger proposed changes in the tax structure. His efforts were not successful. The tax
reform was the most important initiative launched by the Echeverria administration
and its failure marked the rocky course of economic policy for the remainder of the
i t
sexenio. Once again the big capital group had blocked the fiscal reform that the
government needed to accomplish other objectives.
In the end, only the indirect tax went through, and the government relied on
higher indirect taxes for the rest of the sexenio. Ironically, fiscal policy remained a
3 4 Maxfield (1990), 90
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172
relatively ineffective tool for raising state revenue. The basic financial damage was
tremendous. The mix of populist policies that followed this reform failure further
36
burdened the budget and rendered the necessary tax reform all the more unlikely. For
example, subsidies were expanded for housing, the expansion of social security,
nutrition and rural development. All these programs increased government
expenditures and benefited lower income groups. The government foot the bill
through deficit financing, bureaucratic expansion, and foreign borrowing, and in doing
so tried to compensate for the lower private investment that the country was
experiencing. A vicious circle of fiscal profligacy and private sector uncertainty was
now in motion, and the government’s mounting external debt kept it going.
iii. 1973-1974: The Expansion of the Public Sector
In planning the 1973 budget, the Secretariat of the Presidency developed a
“Survey of Investors’ Attitudes”. Its function was to forecast private investment, so
that the government could accommodate public investment according to the probable
behavior of the private sector. Representatives of both big and small capital reacted by
expressing their confusion and distrust, alleging that the country was heading in a
socialist direction, and criticizing the President for the haphazard changes taking place
37
in the economy. For Echeverria, the political realities of the moment and the strong
private sector opposition to his proposed economic reform, led to the adoption of a
3 5 Ibid., 92.
3 6 Newell and Rubio (1984).
3 7 Solis (1981).
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173
policy that in the view o f the president and o f his closest advisers (Horacio Flores de
la Pena) -entailed the lowest risks, that of populism.3 8
Populism, as defined by Dornbusch and Edwards,3 9 is an approach to
economics that emphasizes growth and income redistribution and deemphasizes the
risks of inflation and deficit financing, external constraints, and the reaction of
economic agents to aggressive non-market policies. They also contend that populist
policies ultimately fail, at very high costs to the very groups they were supposed to
favor. Echeverria’s attempt to cast “shared development” as a humane version of the
more austere “stabilizing development”, failed to disguise its populist underpinnings.
When all was said and done, “shared development” sought to spur economic growth
and income redistribution through a policy of job creation and spending, as did
populism.
Bazdresch and Levy argue that populist economic policies include the use of
public expenditures, the introduction of price controls, currency overvaluation, and
uncertain policy signals that depress private investment. In political terms they involve
a regime’s reliance on the support of workers’ and peasants’ organizations, which
generally causes conflict with the private sector.4 0 All of these characteristics can be
found in the policies undertaken by Echeverria’s administration and will be analyzed
later in this chapter.
3 8 Newell and Rubio (1984).
3 9 Dornbush and Edwards (1991), 7-12.
4 0 Bazdresch and Levy. In Dornbush and Edwards eds. (1991), 228.
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174
Of the initial conditions that, according to Dornbusch and Edwards, generally
led to the implementation of populist policies, Mexico presented just one: a highly
uneven distribution of income that reflected serious political and economic problems.
Other conditions, such as moderate growth, stagnation, or outright depression as a
result of previous stabilization attempts, emerged after the first two years of
Echeverria’s administration. GDP grew at a rate of 6.3% and 6.9% in 1969 and 1970
respectively, which by no means can be said to be an economy characterized by
moderate growth, stagnation or depression. During the first year of Echeverria’s
administration, the growth rate decreased considerably and GDP grew only 3.8%. As
Echeverria saw it, there should be no conflict between growth and income distribution.
Both could be achieved by job creation and through a substantial increase in the public
sector’s participation in the economy. The state could correct such deficiencies as the
failure of the private sector to invest in those sectors of the economy considered
strategic by the government, and it could bridge the distributional gap by expanding
services like housing, education, health and nutrition.4 1 Table VI.6 shows that the
growth component of labor is more stable than that of capital, so as the government
intervened and retreated in the economy it accentuated capital volatility and the
economic cycle.
4 1 Enriquez. In Philip (1988).
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Table VI.6 Mexico: Sources of Growth 1970-1980
Average Annual rate
o f Growth (%)
Contribution to GDP
Growth (%)
Year GDP Capital Labor Capital Labor
1970 6.9 6.6 3.0 2.3 1.8
1971 3.5 5.3 3.3 1.9 2.0
1972 7.3 6.1 3.3 2.1 2.0
1973 7.6 7.0 3.3 2.5 2.0
1974 5.9 7.5 3.3 2.6 2.0
1975 4.1 8.3 3.3 2.9 2.0
1976 2.1 7.3 3.3 2.6 2.0
1977 3.3 5.2 3.3 1.8 2.0
1978 7.3 6.4 3.3 2.2 2.0
1979 8.0 8.2 3.3 2.9 2.0
1980 8.3 9.1 3.3 3.2 2.0
Source: Looney (1985).
Accordingly, Echeverria followed suit with large infrastructure projects and an
expansion of education and public health services. But also akin to populism,
expansion of government expenditures was accompanied by a substantial waste of
resources and corruption. It exacerbated the steep increase in the fiscal deficit, and
perpetuated the need for ever higher levels of external borrowing. These policies,
combined with a fixed exchange rate, were simply unsustainable. Public finances grew
increasingly weaker, and eventually the disequilibrium in external accounts became
unmanageable.4 2 The fiscal deficit rose from about 2.5% of GDP in 1971 to about
42 Lustig (1998).
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176
10% in 1975. Tables VI.7 and VI.8 show some of the most important economic
indicators of the period.
Table VI.7 Revenues, Expenditures, and Real Fiscal Deficit 1970-1976
Year Fed.Gov.
Revenues
Fed. Gov.
Expenditures
Fed. Gov.
Deficit
Parastatal
Sect. Rev.
Parastatal
Sect. Expend
Parastatal
Sect. Def.
Deficit as
% of GDP
1970 95.3 94.6 -.7 3.56
1971 76.4 83.4 7.0 105.8 105.6 -.2 2.41
1972 91.2 118.3 27.1 87.9 94.6 6.7 4.71
1973 94.1 131.7 37.6 105.8 115.7 9.9 6.57
1974 105.3 143.4 38.1 122.1 138.6 18.5 6.99
1975 133.4 187.4 54.0 147.7 186.6 38.9 9.71
1976 137.8 190.6 52.8 139.5 169.3 29.8 9.50
Source: Newell and Rubio (1984).
Note: Constant Pesos o f 1975.
Table VI.8 Indicators for Public Finance (Consolidated Public Sector) 1970-1976
Year Total
Revenues
Oil
Revenues
Total
Spending
Current
Spending*
Capital
Spending
Debt
Interests
Financial
Deficit**
1970 18.9 22.4 3.8
1971 18.4 3.0 20.5 14.6 4.3 1.6 2.5
1972 18.7 2.8 22.9 15.4 5.7 1.8 4.9
1973 20.2 2.6 25.8 17.0 7.0 1.8 6.9
1974 21.1 3.4 27.0 17.9 7.2 1.9 7.2
1975 23.2 3.3 31.9 21.0 8.6 2.3 10.0
1976 23.8 3.3 32.0 20.7 8.0 3.3 9.9
Source: Brazdresch and Levy. In Dornbush and Edwards (1991).
Note: % o f GDP
*Excluding interest payments.
**The financial deficit includes also ‘financial intermediation’ expenditures, so that it is not equal to the
difference between total revenues and total expenditures.
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177
As government expenditures quickly outpaced revenues, Echeverria saw the
tourist sector as a way to obtain foreign currency and his administration built beach
resorts in Cancun and Ixtapa. But it did not limit itself to tourism. Echeverria also built
a new steel mill and hydroelectric plants and he financed oil exploration.4 3 The
number of state-owned companies increased from 86 to 740 during his term.4 4
Personnel in the public sector increased by 30% in 1974 alone.
During the same period the current account deficit of the balance of payments
jumped from US$0.9 billion to US$4.4 billion, as the government continued its
expansion, and the peso became increasingly overvalued. The foreign public debt rose
from US$6.7 billion to US$15.7 billion between 1973 and 1975 and annual inflation
rose from 3.4% in 1969 to an average of 17.7% in 1973-75,4 5 as the government
followed expansionary monetary policies to finance part of its fiscal deficit.
Echeverria’s government appropriated leftist discourse and made it its own,
abandoning the formerly conciliatory and moderate stance typical of previous
administrations. By doing this, the government sought to appease the radicals on the
left, but it inadvertently prompted radicalism from the right. Eventually Echeverria
tried to distance himself from both the left and the right coining the phrase “neither
left, nor right, up and forward”.4 6 Nevertheless, polarization in the political arena
increased and so did the possibility of economic chaos.4 7
43 Story (1986).
44 Smith (1979).
4 5 Lustig (1998).
46 Basanez (1990).
47 See Newell and Rubio (1984).
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178
The budget for 1973 showed only a moderate increase from the expenditures
of 1972. Margain refused to authorize any increases in public spending that he
considered inflationary, given the absence of any serious effort to increase government
revenue. Notwithstanding, in 1973, public expenditures as a proportion of GDP
reached 27% and the fiscal deficit went up to 6.9% of GDP.4 8 The nation’s treasury
was virtually empty, Margain argued. But by that time the economic reins of the
country were no longer in the hands of the Finance Minister. The economic reins were
at the National Patrimony Ministry, which teamed up with Echeverria, who later
declared, “The economic decisions of the country are taken from Los Pinos.” This turn
of events, and his increased differences with Flores de la Pena, led to Margain’s forced
resignation in 1973. Referring to the need for foreign borrowing, Echeverria declared
that “he would appoint a finance minister who could find the money needed for
expanded government expenditures.”4 9
Echeverria sought a team player to oversee the Finance Ministry. In May 1973,
he chose his friend Jose Lopez Portillo, an appointee with less economic training than
Margain, but one who was more willing to grant loans to farmers, and to spend. At the
same time, Echeverria began promoting Lopez Portillo’s candidacy for the presidency
with this appointment.5 0 Echverrria identified the country’s most demanding problems
as economic, so he placed a confidante like Lopez Portillo in the job where he should
best inform the president with regard to economic issues. Magain’s dismissal left the
48 Zedillo (1986). In Bazdresch et al. (1992), 27.
49 Maxfield (1990).
50 Castaneda (2000).
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Central Bank governor isolated in trying to oppose the rising populism. The business
sector responded to the Lopez Portillo appointment by sending half a billion dollars in
flight capital out of the country. As public sector deficit grew to almost 10% in 1975,
foreign debt relative to GDP rose to 16% in 1975.5 1 See Tables VI.9 and VI. 10 for a
detailed outlook of the public sector deficit, and its financing.
Under the administration’s more populist bent, public investment more than
doubled in two years from 1971 to 1973, an unimaginable increase compared to the
13% annual growth in public investment experienced during the Stabilizing
Development period. Transport and communications were the categories that
experienced the biggest hikes, shifting from one fifth of the public investment budget
to one fourth. This increase in expenditures was facilitated by the new Finance
Minister Lopez Portillo, as he shared Echeverria’s preference for expanding the role of
the government in the economy. The bankers were very concerned with the trend that
fiscal policy was taking and began to fear inflation and devaluation.
Imports were increasing very fast, especially food and fuel, as the current
account deficit exploded by 54% between 1972 and 1973. Some of the increased
foreign debt was going toward capital flight, as the US$145 million in the errors and
omissions account suggested.
5 1 Maxfield (1990).
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180
Table VI.9 Public Sector Finances, 1973-1982
Year Deficit as % of GDP Internal Debt
as % o f GDP
External Debt
as % of GDP
1973 5 3 13
1974 5 8 14
1975 9 11 16
1976 7 11 17
1977 5 11 28
1978 7 12 26
1979 7 14 22
1980 7 14 18
1981 14 18 22
1982 17 28 36
Source: compiled by the author.
Table VI.IO Financing the Foreign Sector Deficit (1971-1976)
Period Foreign
Investment
Private
Sector Debt
Public
Sector Debt
Errors and
Omissions
Short Term
Debt
1971-73 15% 28.4% 55.2% 17.1% -1.0%
1974-76 5.8% 11.8% 87.0% -33.5% 21.9%
Source: Newell and Rubio (1984).
The defeat of the bankers’ group and the loss of monetary restraint left the
bankers feeling increasingly helpless in the face of Echeverria’s inflationary and debt-
fueled spending boom. As a result, more confrontational leaders were elected to
represent business organizations: COPARMEX elected Andres Marcelo Sada, a
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181
businessman who believed that the government was out to destroy free enterprise and
that only through political action could the private sector defend private property in
Mexico. He replaced Guajardo Suarez who formed close ties with Echeverria and did
not support the more confrontational approach now advocated by the organization’s
members. Other business organizations like CONCANACO and CONCAMIN also
took an aggressive stance, while CANACINTRA swung alternately between
conciliation and defiance. The Banker’s association kept a low profile and complained
mainly in private meetings.5 2
Not long after Margain’s forced resignation, rising inflation forced Echeverria
and Lopez Portillo to tighten their spending. They launched a stabilization plan in
mid-1973,5 3 based on contractionary monetary policies. Thus, this was the second time
during the young administration that the economy was forced to slow down. But an
inflationary trend had already begun, and labor unions pressured for salary increases.
Again, we can clearly appreciate at this point that fiscal policy followed a procyclical
behavior, as soon as the economy slows its growth, the government contracts public
spending, accentuating the economic cycle. What economic theory would predict is
that the government either increase its spending to help smooth the cycle or to
maintain it at the same level to at least not interfere with it. Interest groups eased their
economic pressures as they saw the economy going into a recession. Labor at this
point only wanted to maintain its purchasing power. This is why it is easier for the
government to cut expenditures during recessions.
52 Conchiero, Gutierrez,and Fragoso (1979).
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The assassination of Eugenio Garza Sada, an industrial leader in Monterrey on
September 1973 marked the breakdown of the relationship between government and
business under Echeverria. From then on the business sector engaged in an open battle
against the government, using its usual weapon of capital flight to pressure for more
conservative policies, such as the reduction of the fiscal deficit and less state
intervention in the economy.
iv. The Shift Toward Debt-backed Public Spending
In late 1973 government-controlled prices increased, ending the traditional
policy of keeping them tightly fixed. Electricity rates went up by 30% and
hydrocarbons by 55%. In early 1974, real wages were held to the level of 1970. But
capital did quite well, as profits were extremely high during those years. Oil prices
increased drastically at the end of 1973 a trend that would continue until 1981. The
world in general was experiencing high inflation and stagnant growth, a situation that
did not help the Mexican economy.
As the boom in international financial markets escalated in the wake of the oil
price shocks, Mexico’s domestic financial sector took full advantage. The benefits
flowed unequally to the Mexican economy, as credit was allocated to a few privileged
borrowers and the multi-sector conglomerates, or ‘grupos’ received the biggest share.
International financing was now cheaper than domestic credit, but few small agents
had access to international markets. Thus, large-scale firms were the big winners, as
5 3 El Dia, July 26 1973.
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183
they could finance investment, enjoy the benefits of foreign exchange speculation, and
profit as creditors, borrowing abroad and lending in the domestic market at a higher
cost.5 4
The budget for 1974, as explained by the Finance Minister, sought to combine
the fight against inflation with the structural objectives of the administration.5 5 It tried
to satisfy two contradictory demands: inflationary control and economic expansion.
The 1974 budget planned a 14% increase in public expenditures, although this number
was considered moderate since revenues were expected to increase by 28% over the
previous year. The private sector responded favorably to the announced budget that
year, since they saw it as more conservative than that of previous years.
In April 1974 the Congreso del Trabajo (CT), with the cooperation of the
federal government created the National Mixed Committee for Wage Protection, the
purpose being to protect wages against inflation and stagnation. This strengthened the
ties between government and the popular classes. As a first step, Echeverria created
FONACOT5 6 for the purpose of granting credit to workers through established stores
and promoting workers’ savings. The capital for CONASUPO, the state-owned supply
store, was doubled in order to channel the marketing of food supplies. In 1974
CONASUPO’s total expenditures were 18 billion pesos, up 8.4 billion pesos from the
previous year. CONCANACO and CONCAMIN criticized these policies as
representing a threat to private businesses due to unfair competition with the
5 4 Maxfield (1990).
5 5 Secretaria de la Presidencia, El Poder Ejecutivo en el Congreso, vol. iv Sep 1974.
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184
government and for offering special treatment to public institutions. Business
organizations also tried to stop wage increases, arguing that these, along with public
spending were the main causes of inflation.5 7
While public spending continued at the planned levels, monetary policy and
credit were tightened. Public investments were also executed, despite uncertainties
that there would be enough funds to finish the projects that had been started. As the
fiscal deficit continued to increase, new projects were judged not by their usefulness
but by their effect on the fiscal deficit, which was running at 7% of GDP in 1974.
External financing, increased from $7,070 million to $9,975 million, a 41% increase in
one year. Domestically, the government raised interest rates and the legal reserves of
the banks to finance part of its deficit, making internal financing expensive and
58
limiting the resources available.'
In his fourth State of the Union address, Echeverrria severely criticized a new
class of currency speculators, calling them “rich Mexicans who buy dollars in order to
cause a devaluation, they only provoke the rejection of their countrymen and their own
children...” This quote reflects the increasingly antagonistic approach he was taking
towards the private sector. He also declared that he would sustain a fixed exchange
rate and a fiscal policy that, although austere, would not limit the state’s action in
priority sectors.5 9 The business community, notwithstanding the president’s harsh
56 Fondo Nacional para el Consumo de los Trabajadores, state owned stores for the benefit of the
workers, created to strengthen the workers wages.
57 Tello (1979).
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185
speech, expressed its support for the government’s programs. But days later the leader
of CONCAMIN made a declaration against the price control schemes that the
government had implemented. The private sector argued that price controls scared
away investment and would deter production without lowering inflation. Subsequently
labor and business agreed on a salary increase of 22% to appease tensions between the
two. CANACINTRA’s leader later declared that “the measure would undoubtedly
have an inflationary impact.”
In mid-September 1974, the principal business groups6 0 published a manifesto
in which they complained about the credit restrictions, as well as the wage and cost
increases that they had tolerated during recent years. They again rejected any kind of
price control system because it could put the survival of private enterprise in jeopardy
and it meant greater government involvement in the economy. They also asked for
ownership guarantees on privately held farm lands, and denounced the statist policy of
the administration.
During this same period, the executive sent a decree initiative to Congress to
reform the Federal Labor Law, so as to make salary adjustments every year. The
administration also raised agricultural guarantee prices to protect farmers from
inflation. This measure was a blow to the fight against inflation because the stability of
basic product prices was a cornerstone of this battle. It was clear that at this point, the
government had disregarded the pressures from big and small capital and instead acted
to protect the interests of labor and peasants. That year Mexico registered its highest
60 CONCANACO, CONCAMIN, COPARMEX and the CNC o f Mexico City.
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186
inflation rate in recent history, approaching 21%, on an annual basis, and growth
declined moderately at 5.8% with respect to growth rates of previous years. But the
most worrisome trend was the increase of the deficit of the current account as it went
from 3.5% of GDP in 1973 to 6.2% in 1974. Two government agencies were mainly
responsible for the rapid growth in public sector imports, CONASUPO and PEMEX.
Imports of wheat and corn increased rapidly as a result of agricultural stagnation. In
fact, 1974 was the first year in modern history that Mexico became a net importer of
agricultural goods, going from a surplus of US$304.5 million in 1970 to a deficit of
US$35 million in 1974. Fuel imports also increased because production was affected
by low levels of investment in the industry since the late 1960’s, although this was
offset by the higher price of fuels after 1974 and the oil discoveries during those
years.6 1
As the government took a more prudent approach to spending, it followed a
countercyclical fiscal policy. While the economy had slowed down again and even
though, the government was more cautious with its expenditures, the fiscal deficit for
1974 increased to 7% of GDP. The deficit expanded while the economy slowed down
probably because the government considered it a temporary slowdown.
6 1 Solis (1981) and Tello (1979).
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v. 1975-1976 The Deepening Crisis
External conditions did not improve for 1975. The executive launched another
fiscal reform in response to the precarious situation of government accounts. The main
tax increases were on luxury goods and real state investments.
In April the CCE (Consejo Coordinador Empresarial) was created by the
leaders of the main business associations.6 2 In launching the CCE business interests
hoped to influence the choice of the next presidential candidate, and to centralize the
political control of entrepreneurs as it had been difficult to maintain close coordination
among the leaders of the various entrepreneurial organizations.6 3 Thus, the private
sector formed the CCE to be more united and effective in its opposition to the left-
oriented policies of the Echeverria administration. The business leaders were asking
for a retreat of the state from economic affairs, and a larger role for private firms. The
president categorically rejected the demand of entrepreneurs that the government sell
the state-owned enterprises, declaring that there were essential to the revolutionary
regime as they represented the interests of all Mexicans. In his Fifth State of the Union
address in 1975, Echeverria declared that the country was not going to be changed by
small groups, especially the rich and powerful.
In November of 1975 small and middle landowners began a strike in Sonora
and Sinaloa, backed by the CCE, against local agrarian authorities who sought to
62 The CCE included: CONCAMIN, CANCANACO, COPARMEX, Bankers Association, CMHN and
the Mexican Insurance Institutions Association. Note the exception of CANCACINTRA, which
opposed its formation, since its leader had assumed a nationalist position. For further analysis on the
formation of the CCE see Tirado (1979).
6 3 Basanez (1990).
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188
expropriate their land. The CCE called for a general strike, but since they were
incapable of achieving this goal, this only demonstrated the lack of influence the
business leaders had with the population. They did manage to halt the agrarian
expropriations at least during 1975. But land seizures took place in October 1976 in
the state of Sonora as Echeverria was leaving office.
The monetary policy for 1975 was restrictive. The legal reserves of the banks
were high and the government used them to finance its fiscal deficit. The increase in
government bonds held by the public and dollar accounts in the banking system
reached 29.7% of total savings. Government expenditures reached 40% of GDP, an
increase of 22.6% from the previous year, but by the end of 1975 public expenditures
were already showing signals of contraction, as it was evident that the economy was
entering a strong recession. There was an increase in unemployment, a decrease in
economic activity. The rate of growth of several industries was declining and sales
were down too.6 4
The critical situation that the economy fell into by late 1975 is evident in the
following indicators: private investment declined, the current account deficit was 6.8%
of GDP, the inflation rate was 11% and the external public debt reached US$14,449
million representing an increase of almost 45% in only one year.
The budgeted expenditures for 1976 were 10% higher than expenditures in the
previous year, but represented a decrease in real terms as inflation kept increasing. The
government argued that this increase would lead to a higher level of consumption
6 4 Tello (1979).
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189
expenditures by the private sector.6 5 Tello ironically explains, “as if the speculation of
the peso signaled that the private sector was willing to increase consumption and
investment in the country.”6 6 The private sector was increasingly skeptical and flight
capital continued its outward flow.
The economy had undergone a dollarization process as the public perceived the
peso to be overvalued and the government to be less capable of sustaining its value.
Dollar accounts were opened for the general public in the financial system with the
permission of the Central Bank, the intention being to keep money from fleeing
abroad. But overall, banking activity decreased, capital flight continued and the
restrictive monetary and fiscal policy exacerbated the pending crisis. In the last year of
the administration, federal government net expenditures were down almost 6% from
the previous year, the federal government’s primary expenditures were down 8% in
that same period, and current expenditures declined by almost 9%.
Since devaluation was politically costly and 1976 was an elections year, the
government delayed the decision as long as it could, hoping the economic situation
would improve, which did not happen. Faced with a severe decline in the rate of
growth of real GDP and a deepening recession, the administration again increased
public spending. As rumors of devaluation mounted, capital flight increased
considerably, undermining the efforts of the government to entice money into the
economy via external loans.6 7
6 5 Secretaria de la Presidencia, El Poder Ejecutivo en el Congreso, vol. iv, Sep 1974.
6 6 Tello (1979), 65.
67 Enriquez. Opcit.
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In 1976, the private sector initiated a massive wave of capital flight, pushed by
the leftist rhetoric and actions of the government, and the erratic course of economic
policy and state expansion. This was a powerful political weapon that the private
sector used against the government to show its discontent with policies like the land
expropriation in the Yaqui Valley earlier that year.
In August, the peso was allowed to float in the foreign exchange market for the
first time in twenty-two years. As the fixed exchange rate came to an end and lost 40%
of its value, external sources of credit dropped off. Output fell sharply and inflation
accelerated, and the government turned to the IMF for financial relief. An extended
fund facility loan was agreed to later that year.6 8
Procyclical fiscal policy had been the overriding story of the sexenio. Every
time the economy seemed to improve, the government increased spending; when the
economy showed signs of slowing and inflation picked up, the government promptly
reduced spending. In this way the government exacerbated the ups and downs of the
economic cycle rather than working to smooth the bumps. The Echeverria
administration confronted big and small capital alike making this sexenio one of the
worst in terms of government-private sector relations, and a supposed friend of labor.
Of course, it was the latter who would go on to bear the bulk of the adjustment burden
when the 1982 shock hit- a crisis largely provoked by domestic policy errors through
the 1970’s. During the last two years of the Echeverria administration fiscal policy
6 8 Lustig (1998).
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191
was procyclical. In both years the growth rate of the economy declined, while the
fiscal deficit was decreased too, although at a slower rate.
vi. Conclusion
When Luis Echeverria became president in 1970, a new era began for the
Mexican political economy. The situation was not optimal, as the population had not
forgotten the violent events of 1968. Echeverria tried to make amends and promote
consensus, and did so by embracing the post-revolutionary objectives of economic
development and social modernization, and justice. He departed from the once
successful strategy of ‘Stabilizing Development’, which had produced high growth
and stability for two sexenios, but also a large social deficit. Echeverria’s new
economic strategy, ‘Shared Development’, was an effort to include the less fortunate
classes in the country’s economic gains. His administration started in 1971 with a tight
approach to fiscal and monetary policies in accordance with the difficult economic
situation that the country was in. As the growth rate decreased, the financial deficit of
the country also decreased during the first year of the administration, typical of a
procyclical fiscal policy adjustment.
The procyclicality of fiscal policy under ‘shared development’ continued as
economic growth accelerated in 1972 and populist policies influenced a steep increase
in the public deficit. The following two years, 1973 and 1974, produced a change in
trend of fiscal policy as it turned to be countercyclical. GDP growth slowed, while
populism continued and the public deficit increased. In other words, the government
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192
succumbed to pressures from different interest groups that expected benefits from the
populist approach that the administration had exposed. Of enormous influence was the
participation of the National Patrimony Minister Flores the la Pena, who opposed the
fiscal conservative approach of the Finance Minister and even was successful in
getting him replaced. During the last two years of the administration, procyclicality
returned. In 1975 fiscal deficit increased considerable, while the economy continued
its trend in economic growth. In 1976 the fiscal deficit was reduced and the growth
rate declined. Overall, the government mainly followed a procyclical fiscal policy
during the sexenio, as it cut spending when the economy slowed its growth rate and
increased spending when the economy accelerated. There is little indication during
this period that the government planned on smoothing the economic cycle, as
economic theory advocates.
The main achievements of Echeverria’s administration were: 1) A rapid
increase in public expenditures in the rural sector via credit and infrastructure; 2)
Higher public spending on social welfare, mainly in education and housing; for
example social expenditures increased from 5.32% of GDP in 1971 to 7.87% of GDP
in 1976, a total increase of 48%. Education spending increased 59% during the
sexenio and health spending increased 37% over the same period; 3) The negotiation
of better salaries for labor; 4) The development of basic industries such as steel, fuels
and petrochemicals, mainly due to state sponsorship.6 9 See Table VI. 11 for an in depth
look at some of the most important indicators of the sexenio.
6 9 Tello (1979).
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193
When Echeverria came to power, Mexican fiscal policy had for many years
subsidized a variety of interests to promote industrialization. Yet, industrialists,
enjoyed protection and promotion without paying much in return. Echeverria started
his sexenio on good terms with the private sector. For example, he created the
National Tripartite Commission in 1971 as a method of consultation for investments
and policies. But his fiscal and commercial policies and growing alliance with
7 0
organized labor created tensions with the private sector.
In the final analysis, Echeverria sought an easy solution to the dire income
distribution problems: he expanded public expenditure but without allocating it more
efficiently. Rather than choosing between industrialization or distribution, Echeverria
decided to increase public spending in both areas. He did this without the vital tax
reform that he had proposed, which was defeated by enormous opposition from the
business community. At the same time, tariffs and public prices were not changed in
the initial years to control inflationary pressures. As a result, the budget deficit grew
and was financed by the central bank and external loans. Since the financial system
was unable to keep up with the spending spree, inflation accelerated and pressures on
the exchange rate mounted.7 1
The public deficit more than doubled during the sexenio, from an average of
2.5% of GDP in the period 1965-1970, to 5.7% in 1971-1976.7 2 Public sector
expenditures increased from an annual average of 6.5% of GDP in the mid-to-late
70 Bailey (1988).
7 1 Enriquez. Opcit.
7 2 Ibid.
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194
1960’s to more than 17% of GDP in the final two years of the Echeverria sexenio.
Public sector investment expenditures increased from an annual average of less than
6% of GDP in the first year of the administration to more than 12% in the last year. In
the federal budget, the balance of current receipts to current expenditures covered 76%
of capital expenditures in 1971, but only 24% in 1975. The largest increases in current
federal government expenditures in the Echeverria period were for transfers, most of
which went to public enterprises. Transfers reached an average of 3.4% of GDP from
1973-1976. The largest subsidies, which represented an important drain on the federal
budget, were toward reducing energy prices, operating railroads and lowering food
73
prices.
The number of state-owned corporations expanded from 86 in 1970 to 740 in
1976. By the end of the Echeverria period, public enterprises dominated the oil,
electricity, sugar, steel, petrochemicals, transportation, and communications industries,
with the public sector accounting for around 45% percent of GDP.7 4
The government’s debt grew from US$4 billion to US$22 billion and the
money supply continued to rise. As a result, the central bank was financing
government expenditures. Domestic financial instruments became useless7 5 since the
public was not willing to buy government bonds and preferred to convert their savings
to dollars. This situation worsened an already difficult relation between the
government and the business community and led to increasing capital outflows and
7 3 Looney (1985).
7 3 Ibid.
7 5 Enriquez. Opcit.
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195
further weakening of the balance of payments, which were already deteriorating as the
growth in public spending increases promoted a flood of imports.
Solis affirms that if the government had exercised a level of pressure similar to
its forcing of the generalized wage adjustments and controls of 1973, the 1972 tax
reform would have been successful...It is hard to understand why some members of
the private sector (bankers, for instance) opposed the tax reform. It was clear that the
reform was a measure that would maintain some degree of stability. They knew and
were told that one of the first casualties of inflation would be the financial system, and
their own areas of interest would lose relative importance. The influence of their
institutions would be diminished and they would lose relative power. “It seems that
they reacted on ideological grounds, as wealth-holders, rather than as managerial
76
personnel who would have assessed the issue in strictly rational terms”.
Political and economic changes were undertaken at the same time and were so
closely connected that they cannot be judged as two separate processes, as Solis
explains. Growth was no longer the only economic objective. Structural changes were
required so that benefits could be spread more widely and income distribution could
be improved. However, the reform process succumbed to chaotic political and societal
forces that only perpetuated the country’s stagnant social structure.7 7
One of the main causes of the damage that Echeverria’s sexenio wrought on
economy was fiscal policy, or the lack thereof. On the one hand, his fiscal policy
crowded out private investment. It led to an overly assertive public sector, and a
76 Solis (1981), 93.
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196
manifestation of the statist model of development that the left had always sought and
• • 70
the right always resisted. On the other hand, the fact that expansionist expenditure
policies were implemented within a framework of restrictive monetary policies at the
beginning, but later expanded, led to the decline in private investment. This allowed
for a disproportionate increase in state investment, and at the same time convinced
critics from the left that the business sector was untrustworthy and unwilling to fulfill
its social role and responsibility.
Echeverria’s erratic personal style, his harsh rhetoric, his interference in
technical matters, and the large-scale corruption that characterized his government
offended many in the political class.7 9 As Bailey describes,
Echeverria is viewed by many in the Mexican political class with great
emotion, either as a maniacal aberration, or as one who was well intentioned
and victimized by mistakes and bad luck. We might label the Echeverria
presidency an attempt to open the system by reviving a 1930’s-style populism,
but an effort set in a very different context, and without Cardenas’ skill or
luck.8 0
Powerful political enemies emerged in response to Echeverria’s policies to
combat Mexico’s pressing political and social problems. In trying to solve these
problems, Echeverria’s government ended a history of prudent macroeconomic
management and stability, and led the country to the first of a series of economic
crises that hit the country during the 70’s, 80’s and 90’s. It was a sad finale for this
7 7 Ibid.
7 8 Newell and Rubio (1984).
79 Bailey (1988), 20.
80 Ibid.
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197
government, which, despite good intentions, failed to deliver on its promises of
sustained economic development.8 1 “Shared development”, was all but dead by 1976.
Intense political conflict between the business sector and the government, not
seen since the Cardenas administration in the 1930’s, doomed Echeverria’s sexenio.
As Basanez explains, “this constituted the first time in the post-war period that the
basic agreement at the top was threatened.” 8 2 Both sides lost confidence and both
were involved in mutual destruction.8 3 The sexenio finished with a severe crisis of
trust aggravated by Echeverria’s decision to expropriate land in Sonora to create
ejidos. During the sexenio the private sector failed to consolidate its hegemony,
although it made several efforts and received strong support and financing from
foreign capital. The state sector instead prevailed continuing to maintain its influence
and the support of labor and the agricultural sector.
To conclude, Echeverria’s legacy was numerous contradictions in economic
policy, as pointed out by Marquez. These included the use of fiscal policy to reform
the social structure, without creating an adequate tax base; the promotion of exports,
while maintaining an overvalued and fixed exchange rate in the face of accelerating
inflation; the strengthening of public sector enterprises while also maintaining their
8 1 Lustig (1998), 19-20.
82 Basanez (1990), 51.
8 3 Alesina and Drazen (1991).
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198
prices at unrealistically low levels; and, the quest to achieve greater industrial
efficiency under a staunchly protectionist policy.8 4
84 Marquez (1977).
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Table VI.11 Summary of Economic Indicators and Government Expenditures, 1970-1976
Cateqory 1970 1971 1972 1973 1974 1975 1976
Com m ent 1971-
1976
Real GDP 2,341.00 2,429.00 2,629.00 2,835.00 2,999.00 3,171.00 3,312.00 147.17 avg growth
GDP Growth % 6.5 3.8 8.2 7.8 5.8 5.7 4.4 5.95 avg growth
Inflation % 5.2 5.5 21.3 20.7 11.2 27.2
from 5.2% to 27.2%
increase of 423%
Exchange Rate pesos/dollar 0.01250 0.01250 0.01250 0.01250 0.01250 0.01250 0.01995 devaluation of 59.6%
Interest Rate (Mex Cetes 91
days) 9.37 9.03 9.00 9.63 10.19 10.19 9.39
Fed. Gov. Net Total
Expenditures % of GDP 10.36 9.90 12.28 13.47 13.99 16.98 15.99
from 9.9% to 15.99%
increase of 61.51%
Fed Gov Primary
Expenditures % of GDP 9.35 8.92 11.33 12.52 12.78 15.74 14.46
in 4 years increase
of 76.45%
Fed Gov Interest
Expenditures % of GDP 1.01 0.98 0.96 0.96 1.21 1.25 1.53
from .98% to 1.53%
increase of 56.12%
Fed Gov GCU % of GDP 5.81 6.10 6.85 8.39 9.20 10.96 10.01
last GDO vs last
LEA increase of 72%
G overnm ent Investment %
of GDP 0.97 0.90 1.31 1.59 1.36 1.45 1.46
from .9% to 1.46%
increase of 62.2%
Debt Interest % of Total
Expenditures 9.09 10.66 11.80 9.72 8.44 9.13 avg 9.8%
Capital Expenditures % of
GDP 4.55 3.80 5.43 5.08 4.79 6.02 5.98
from 3.8% to 5.98%
increase of 57.37%
Transfers % of GDP 0.99 0.82 1.20 1.13 1.01 1.35 1.86
increase of 127% in
4 years
Governm ent Social
Expenditures % of GDP 4.81 5.32 6.27 6.27 6.56 7.20 7.87 increase of 48%
' s O
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Table VI. 11 Continued
Cateqory 1970 1971 1972 1973 1974 1975 1976 Com m ent 1971-1976
Governm ent Education
Expenditures % of GDP 1.75 1.91 2.08 2.17 2.28 2.78 3.03
from 1.91% to 3.03%
increase of 59%
G overnm ent Health
Expenditures % of GDP 2.52 2.89 3.15 3.17 3.57 3.67 3.97
from 2.89% to 3.97%
increase of 37%
G overnm ent Social
Expenditures 113.50 130.60 167.20 181.20 201.30 233.00 265.80
Governm ent Education
Expenditures 41.40 47.00 55.40 62.60 69.90 89.90 102.50
Governm ent Health
Expenditures 59.40 71.10 84.10 91.60 109.60 118.80 134.10
Public Sector Financial
Deficit -83.3396 -86.4724 93.5924 -68.3235 -141.2529 -208.3347 231.5088
Public Sector Primary Deficit -32.774 -34.006 -36.806 -11.34 -68.977 -123.0348 127.8432
Public Sector Operational
Deficit -63.9093 -33.2773 90.7005 -73.71 -96.8677 -225.141 141.7536
Public Sector Financial
Deficit % of GDP (3.56) (2.41) (4.71) (6.57) (6.99) (9.71) (9.50)
from -3.56% to -9.50%
increase of 166.85
Public Sector Primary Deficit
% of GDP (1.40) (0.40) (2.30) (3.88) (3.86) (6.26) (4.80)
from 1.40% to 6.26% in
1975 increase of 347.14
Public Sector Operational
Deficit % of GDP (2.73) (1.37) (3.45) (2.60) (3.23) (7.10) (4.28)
Public Debt Total 4,262.70 4,545.80 5,064.60 7,070.40 9,975.00 14,449.00 19,600.20
Public Debt Lonq-Term 3,259.90 3,554.40 4,322.20 5,731.80 7,980.80 11,612.00 15,923.40
Public Debt Short-Term 1,002.80 991.40 742.40 1,338.60 1,994.20 2,837.00 3,676.80
O
O
201
VII. Managing New Wealth and Confront of Crises: Lopez Portillo (1976-1982)
i.- A Friendlier Approach Towards the Business Class
Since Echeverria’s likely project was to extend his influence over the
presidency beyond his own term, he sought a successor who was a competent
administrator but a weak politician.1 The perfect candidate and uncontested winner of
the 1976 presidential race was Echeverria’s childhood friend, Lopez Portillo, a
candidacy that had been a long time in the making. Echeverria had first appointed
Lopez Portillo as general director of the Federal Electric Commission CFE in
September 1971. In 1973 Lopez Portillo was appointed Finance Minister, and
Echeverria explained that he chose him because he was the best informed person on
economic issues.2 But Lopez Portillo was also the one with the fewest political
commitments and hence brought the strongest loyalties to both the president and the
ruling party.3 He would therefore not be opposed by any of the various factions of the
party.
This becomes more evident when one considers who lost out in the presidential
“dedazo”. The big loser was Mario Moya Palencia, the Interior Minister, who had
been a strong presidential contender during the first years of the Echeverria
administration lost ground as he accumulated too much power. Moya sought the PRI
nomination by building an independent political power base, rather than waiting for
1 Bailey (1989).
2 Castaneda (2000).
2 Excelsior, November 13,1975.
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202
the president to bestow his favor. Moya was supported by governors, deputies,
senators, the business and financial sectors, everything he needed to win. But he
lacked one vital ingredient: the willingness of the president to accept a successor with
independent strength.4
Lopez Portillo inherited a policy trajectory that was characterized by frequent
shifts, as the executive sought to respond to different pressures. Some came from the
left, for fear that he would not follow through on the progressive reforms he had
promised. The right would then act up, as some groups were afraid that Echeverria’s
reforms were too radical. There were some attempts to promote a democratic opening,
and then lapses back into repression. Economic policy similarly vacillated between
orthodox restrictions and populist redistribution. When he left power, Echeverria’s
legacy was the most serious crisis since the 1930’s, the first devaluation in over two
decades and a society that was sorely divided. The business community had turned
against the government, as had those popular sectors that had not received the benefits
they had been promised.
With the failure of Echeverria’s shared development, the stabilization of the
economy within the framework of an IMF program became a top priority. The public
sector deficit had reached 9.9% of GDP in 1976, and was targeted to be cut to 2.5% by
1980, an adjustment that was manageable without many sacrifices. No major cut in
public spending was programmed for 1977, only a cut in government current spending
of .5% of GDP. The way that the program tried to reduce the public sector deficit was
4 Castaneda (2000).
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to increase public revenues by 2% of GDP. No privatization of state companies was
planned, and real wages were to be restrained but not cut. Finally, flexible interest
rates were set to promote savings and deter capital flight.5
Economic recovery was Lopez Portillo’s top priority when he assumed office.
Thus, the new president put his closest advisers to work in search of solutions, and
attempted to restore business confidence and popular support. The chosen path to
recovery turned out to be the rapid development of oil exploitation and exportation.6
Thanks to high oil prices, the recession that followed the 1976 crisis was short-lived,
and as Lustig explains, instead of adjusting to scarcity, the government now had to
‘administer abundance’, a phrase often used by Lopez Portillo. The widely shared
official view was that, based on its increased oil exports, Mexico would be able to
grow at unprecedented rates from 1978 onward.
Lopez Portillo quickly displayed his determination to restore political calm and
to reassure business leaders, which had been alienated during the previous sexenio, of
the government’s cooperation and support. Lopez Portillo gave a brilliant inaugural
address, where he displayed his private sector commitment by launching the ‘Alliance
for Production’8, and gained the support and trust of all the different interest groups.
He stated that he would “stimulate the dynamic, effective collaboration of every
sector” and would guarantee “the legitimate expectations of businessmen.”9 Mexican
5 Luke. In Philip (1988), 47.
6 Teichman (1988).
7 Lustig (1996).
8 The economic plan for his sexenio, explained in the next paragraph.
9 Story (1986), 153.
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business leaders were pleased with his stance. On December 10, 1976 140 large
companies signed an agreement with the government to coordinate their investment
plans toward the goal of creating 300,000 jobs. This marked a reversal in the
diminishing trend of private investment over the previous five years.
Lopez Portillo’s strategy of governance was ambitious and well integrated
conceptually. In addition to the ‘Alliance for Production’, he called for administrative
and political reform. The ‘Alliance for Production’ was meant to re-establish a pact
among labor, business and government in order to stimulate investment and growth,
and to coordinate planning between the private and the public sectors. It initiated
stricter control over public spending, tax exemptions for export products of firms
under 100% Mexican ownership, reduction of taxes on enterprises, and increases in
prices of basic goods.1 0 It was an attempt to increase private sector confidence.1 1
However, workers pressured the official labor leaders to stand up for their interests, as
they quickly saw that the ‘Alliance for Production’ was not going to benefit them.1 2
The goal of the administrative reform, a long-standing personal interest of
Lopez Portillo’s, was to bring order to the chaotic public bureaucracy. Economic
recovery required rational administrative procedures, which entailed the
implementation of programmed or goal-based budgeting and the reallocation of
economic functions under four ‘superministries’: Finance, Commerce, Patrimony and
Industrial Development, and the newly created Budget and Planning Secretariat (SPP).
1 0 Ibid.
1 1 Luke. Opcit., 51.
1 2 Grayson (1980), 131.
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The reform undermined the Ministry of Finance, as the Ministry of Planning and
Budget was to take control over planning, budgeting, and program evaluation,
eliminating the traditional role of the Finance Ministry in controlling expenditures,
and relegating it to revenue collection, public debt management and the setting of
credit and monetary policies. The Ministry of Patrimony and Industrial Development
continued to be in charge of monitoring, conserving and administering public lands,
and non-renewable resources including gas and oil. The Ministry of Commerce was
left with the duty of overseeing trade, export promotion, pricing policies and the state-
owned food distribution agency, CONASUPO. A team of technocrats loyal to the
president was placed in charge of these ministries, phasing out the Echeverristas. This
marked a major overhaul of public administration in Mexico.1 3
The presumed role of Budget and Planning as a new super ministry caused
suspicion and hostility, mainly due to its evaluatory function. Moreover, the head of
this powerful ministry would be a natural candidate to be hand-picked as president for
the next sexenio. It created tensions with the Finance Ministry and in 1977 in a
defensive move Finance created a General Directorate of Treasury Planning. With
Undersecretary Miguel de la Madrid in charge, the new directorate competed with the
Ministry of Budget and Planning.1 4
Institutional tensions were further aggravated by the appointment of ministers
with different ideologies to head competing ministries. For example, a national
populist, Carlos Tello ran Budget and Planning, while a strict monetarist, Moctezuma
1 3 Ibid, 127-128.
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Cid, headed Finance. The national populists wanted to create a strong and independent
Mexico with a dominant public sector, a subordinate private sector, and a broad
popular alliance to support this arrangement. They pushed for a closed economy with
limits on foreign investment, direct government intervention in the economy through
state-owned enterprises, major social-spending programs, increased subsidies and
government spending. The other faction of the cabinet, the so-called liberal rationalists
wanted to establish an economically sound base for sustainable growth, to promote
capital formation and productive employment, close collaboration with the private
sector, rapid trade growth and an open economic relationship with the rest of the
world.1 5 See Table VII. 1 for an overview of the most important appointees of the
Lopez Portillo administration.
Tensions peaked during 1977, when an internal cabinet dispute erupted over
the budget for 1978. Tello advocated an increase in government expenditures to
eliminate supply side bottlenecks, and to expand the domestic market to increase
social welfare. He proposed expanding the money supply and generous support for the
state-owned enterprises with central government funds. On the other side, Moctezuma
proposed a more conservative budget in order to comply with an IMF standby
agreement, limiting the money supply to IMF ceilings, and contracting the funds
transferred to all state-owned enterprises. In the end, the approved budget was closer
to Moctezuma’s version, but actual government expenditures in 1978 increased to the
level that Tello had suggested. Lopez Portillo tried to put an end to the tensions and
1 4 Maxfield (1990), 126.
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asked both for their resignations by the end of 1977, but that did not reduce the
tensions between the two policy currents, as they continued throughout the sexenio.
Garcia Sainz replaced Tello at Budget and Planning and David Ibarra took the place of
Moctezuma at Finance.1 6
Table VII. 1 Main Figures of the Lopez Portillo Administration
Person Position
Miguel de la Madrid Followed Garcia Sainz as Minister of SPP
Jose Andres de Oteyza Minister of National Patrimony
Jorge de la Vega Dominguez Minister of Commerce
Jorge Diaz Serrano General Director of PEMEX
Javier Garcia Paniagua PRI President
Ricardo Garcia Sainz Followed Tello as Minister of SPP
Carlos Hank Gonzalez Mexico City Mayor
David Ibarra Followed Montezuma as Minister of SHCP
Julio Rodolfo Moctezuma Minister of SHCP
Porfirio Munoz Ledo Minister of Education
Pedro Ojeda Paullada Minister of Labor
Enrique Olivares Santana Followed Reyes Heroles as Minister of the Interior
Jesus Reyes Heroles Minister of the Interior
Gustavo Romero Kolbeck Governor of the Central Bank
Carlos Tello Minister of SPP
Miguel Mancera Followed Romero K. as Governor of the C. Bank
1 5 Newell and Rubio (1984), 208.
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This dispute shows that the creation of the SPP was problematic for the well
functioning of the government and that contrasting economic ideas remained a source
of conflict inside the administration. Different groups supported each policy current
and were important for the perpetuation of conflict. The private sector supported the
conservative approach, as they preferred less government participation in the economy
and a smaller deficit. Labor supported Tello’s approach, as they wanted more
government involvement and social benefits. The Finance Ministry tried to follow its
typical conservative fiscal policy, while the SPP sought to increase spending and
government largesse. After this event, problems between the two ministries never
reached the importance of this one, but differences continued to be an issue.
The purpose of Lopez Portillo’s political reform, designed by the Minister of
the Interior Jesus Reyes Heroles, was to open new venues for political participation, in
order to gain support from both the left and the right. The proposed reforms signaled
the need to reverse the stagnation that had overcome Mexico’s state-society relations,
which threatened the stability of the political system itself. New parties that had
clamored for recognition were now authorized and in effect became an opposition
force within the system.1 7 The Chamber of Deputies was expanded to 400 seats, one
hundred of which would be guaranteed to these new opposition parties; at the same
time, a system of proportional representation was created. This was meant to provide
the opposition with a legal way to voice their political preferences, but to co-opt them
as well.
1 6 Maxfield (1990), 126-127.
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Taken together, the logic of the political reforms was to restore confidence in
and reinvigorate the PRI-dominated system of governance. The reforms were to be
staggered over the course of the sexenio, with the first two years assigned to recovery,
the next two to establish the basis for sustained growth, and the last two for attaining
high growth.1 8 Lopez Portillo’s initial economic approach conformed with the IMF
guidelines that Echeverria had agreed to before leaving office.
Lopez Portillo argued that in order for his ‘Alliance for Production’ to be
successful, government, industry and labor would have to make short-term sacrifices
for the sake of achieving economic growth over the long-term. The government’s part
was to balance its accounts and recognize the importance of the business sector in the
so-called mixed economy. The business community was expected to operate more
efficiently and to expand investment, while organized labor was to hold down wage
demands and thus benefit from job creation and the control of inflation.1 9
As the sexenio proceeded, the Alliance for Production gained strength.
Mexican business continued to support the administration, and by April 1977 the
powerful Monterrey business group, which had distanced itself from the Echeverria
administration, announced a program to invest 100 billion pesos in Mexico over the
next six years. Lopez Portillo praised them as ‘profoundly nationalist’. By the time of
his first state of the union address, the National Chamber of Commerce and Industry
issued a ten-point program of concessions to the government that included promises to
1 7 Newell and Rubio (1984), 206.
1 8 Bailey (1989), 42.
1 9 Grayson (1980), 129.
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increase wages, hold down prices, and accelerate investment. The country was
experiencing a honeymoon between the private sector and the government for the first
time in many years. Much of this early success was due to Lopez Portillo’s personal
skills, as well as the skills of Interior Minister Jesus Reyes Heroles, who managed the
political reform and was portrayed as the leader of the cabinet. Reyes Heroles was
especially adept at promoting Lopez Portillo’s image as a leader who stressed
administrative rationality and comprehensive planning.2 0
ii.- Struggle for a Consensus in Policies and Oil Development, 1977-1978
Lopez Portillo came to power in the middle of the 1976 financial crisis. The
following year 1977, was a year of adjustment in which, tight monetary and fiscal
policies prevailed, according to IMF’s policy guidelinges. In 1977 total real
investment decreased abruptly and GDP growth was the lowest in more than twenty
years, at 4.2%. The austerity policies followed, led to a lowering of the current
account deficit from US$3.6 in 1976 to US$1.6 in 1977.2 1 1977 was a typical year of
procyclical fiscal policy, when Mexico was experiencing an economic crisis, the GDP
growth rate decreased and the government reduced its total spending. Societal
pressures in this year were low, as interest groups were confident that the government
was doing the right things to cope with the crisis and as their expectations for the
future were optimistic.
2 0 Story (1986).
2 1 Zedillo 1986. In Bazdresch et al. eds. (1991), 29.
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211
Of the total debt contracted by the government, 54.4% was for the parastatal
sector and 45.6% for the federal government. This was the first year of the new
General Law of Pubic Debt, which established mechanisms for the Congress to check
the acquisition, amount and structure of the public debt.2 2 This was on paper, since
Congress was controlled by the PRI and therefore the president had its unconditional
support. Government expenditures declined, as did government revenues, contrary to
the increase that the government had planned, but the former decreased at a faster pace
than the latter. Real government expenditures had fallen 12.7% since 1975, and real
government revenues contracted 2.7% during the same period. The deficit for 1977
was 6.3% of GDP, still higher than what the IMF had targeted, but an improvement
over the previous trend. The reduction in expenditures varied from sector to sector.
The parastatal sector experienced a much bigger cut in total expenditures than did the
federal government. Economic spending fell 4.7% when compared to the previous
year, while social expenditures dropped 18.3% during the same period.2 3 This shows
that Lopez Portillo at the time was either more willing or politically able to reduce
social programs, since his constituents actually believed in his six-year plan and were
willing to wait for future benefits. Although he appeared less populist in the eyes of
the private sector, economic populism was far from eliminated. The reduction in
spending in the first year of his government did not halt the rapid growth of
government and the parastatal sector in the next year, and the appreciation of the peso
continued.
22 Lomeli and Zebadua (1998), 210.
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As the financing problems of the Central Bank eased with the policies
implemented during 1977, deposit rates paid by the banking system increased and this
led to a shift from liquid holdings to longer-term deposits. This meant a renewal of
confidence and the expectation that inflation would be under control in a short time.
Real deposit rates were positive for the first time since 1972. The conclusion was that
the policies had produced the desired results,2 4 but fiscal restraint was short-lived.
As mentioned above, the central project for the sexenio was oil development.
This strategy had been launched during the Echeverria years, with increasing
investments in oil and the idea among some PEMEX bureaucrats that exporting on a
sizeable scale was feasible, given the discovery of enormous oil reserves. But at the
same time there was considerable resistance within PEMEX to such an export-oriented
strategy, mainly from the ‘Generation of ‘38’, those who worked for the newly formed
paraestatal after the oil sector was expropriated in 1938.2 5
This reflects the symbolic role of oil in Mexican nationalism, and its special
place as a revolutionary ideal. PEMEX’s role was to supply the country’s petroleum
needs, to provide subsidized fuel to the private sector, and to promote
industrialization. The major concern of this group during the 1960’s was the ability of
the company to supply the domestic market. In 1970, Echeverria launched an 18
billion pesos investment program to locate new petroleum resources. In 1972 big oil
discoveries occurred in the southeast of Mexico, but the old PEMEX elite tried to keep
2 3 Newell and Rubio (1984), 211.
2 4 Ibid., (213).
2 5 Teichman (1988), 56.
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213
those findings secret and was resistant to the idea of PEMEX becoming a major
exporter.2 6
But as Teichman notes, Lopez Portillo had a different agenda. He was
determined to be a popular president, both with the business community and the public
in general. He needed to find a solution to Mexico’s foreign exchange dilemma. The
annual interest on the external public debt had risen from US$217 million in 1970 to
US$1.07 billion in 1976; he needed to restore Mexico’s creditworthiness and high
growth rates, and he wanted to ensure the adequate flow of resources into government
coffers. Financing needs were being generated by the pace of economic development
that the country was experiencing, the continuing deficit in the current account, and by
the rising debt payments. These were the major reasons for the heightened
commitment to increase oil production.2 7
Since Lopez Portillo saw government spending as an essential instrument to
restore economic growth and strengthen his political support, rapid oil exploitation
appeared to provide the ideal solution. Oil would become the basis for self-sustained
industrialization and help reduce unemployment. Oil exports would provide funds for
the development of the capital goods industry, which could also be a platform for
expanding exports. In a fundamental way Lopez Portillo and his team saw oil as the
cure to all of the country’s ills, and as the motor for development. Finally, it seemed
26 Grayson (1980), 47.
2 7 Williams (1979), 97.
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that Mexico could overcome the external constraints that had impeded its economic
development in the eyes of many policy makers.2 8
He appointed his close friend and experienced petroleum industry
entrepreneur, Jorge Diaz Serrano, as chairman of a group of experts commissioned to
investigate the full potential of Mexico’s oil fields. Diaz Serrano gained the support
and confidence of those PEMEX technocrats that believed in the exploitation of oil as
a way to foster development. His report to the president pointed out Mexico’s oil
potential and even included a timetable for its achievement.
As he started his tenure at PEMEX, Diaz Serrano revised Mexico’s reserve
figures. The official proven reserves of crude petroleum and natural and liquid gas
were adjusted upward from the Echeverria administration’s estimate of 6.3 billion
barrels to 11.6 billion barrels, and by the end of 1977 that number increased to 16
billion barrels. In March 1977, Diaz Serrano presented his Six-Year Plan for the
petroleum industry. The plan acknowledged the insufficiency of development
resources and called for borrowing abroad. The goals of the oil program were
important, as it called for the doubling of oil production and refining capacity and for
the tripling of the country’s production of basic petrochemicals. The goals were set at
2.25 million barrels of oil daily and 4,000 million cubic feet of gas daily to be reached
29
by 1982. Table VII.2 shows the planned and actual production of oil during the
sexenio.
28 Villarreal (1981), 11.
2 9 Teichman (1988), 59.
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215
The total projected investment necessary to reach these goals by 1982 was
initially US$15 billion, five times the investment of the Echeverria period. This
projection was soon increased to US$17 billion as the project included a pipeline to
the United States border. Total spending for the Six-Year Plan was calculated at
US$45 billion, while gross earnings were estimated at US$54 billion.3 0
Table VII.2 Comparison of Planned and Actual Oil Production and Exports*
Year Prod. Planned Prod. Actual Exp. Planned Exp. Actual
1977 .953 1.086 .153 .202
1978 1.246 1.330 .336 .365
1979 1.522 1.638 .568 .532
1980 1.781 2.2 .770 .827
1981 2.028 2.3 .960 1.098
1982 2.242 2.748 1.5 1.5
1983 - 2.748 1.5 1.5
Source: Gentleman, 1983.
* (millions o f barrels per day)
Within the cabinet, there were three different positions regarding how fast to
develop Mexico’s oil resources and how to coordinate them with the goals of
industrialization. The national populist alliance, headed by Andres de Oteyza and
Carlos Tello, took a protectionist view o f oil development and warned about the
petrolization of the economy. The Finance Ministry and the Central Bank favored a
cautious plan, their typical fiscally conservative position, and were supported by some
30 Gentleman (1984), 86.
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216
of the big capitalists of the country who feared the ills of inflation and wanted a
smaller government. Diaz Serrano supported an expansionary campaign meant to
increase his power within the bureaucracy.3 1 As he argued for the most rapid possible
development of oil production capacity, he gathered a social constituency amongst the
workers of PEMEX. He believed that oil export revenues would alleviate Mexico’s
chronic capital shortage, which according to him was the only thing constraining
Mexican industrial growth.3 2
The Minister of National Patrimony and leader of the populists, opposed Diaz
Serrano’s strategy. His nationalist faction thought that the country’s industrial
structure should be built up first, so that Mexico would not suffer the ill effects of the
Dutch disease syndrome. They also wanted Mexico to develop its own technological
and drilling capacity, even if that required more time, instead of contracting with
foreign firms. For the national populists, oil revenues should be used to deepen import
substitution in the short run, and to expand manufactured exports in the long run. This
would enable the government to increase public spending, raise wages, and enlarge the
size of the domestic market.3 3
The national populists also wanted protection for certain sectors of the
economy, tax reform, a strong state role in the economy, and limits on foreign direct
investment. SPP Minister Carlos Tello, was another strong supporter of this view.
SPP, was charged with creating a Global Development Plan, which in turn would
3 1 Maxfield (1990), 123.
32 Yunez (1981), 210-234.
3 3 Maxfield (1990), 123.
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Il l
guide the drafting of sectorial plans. He stressed agricultural self-sufficiency as a
priority.3 4 The social constituency for this position was comprised of organized labor
and small and medium sized businesses, as well as their representative organizations,
CONCANACO and CANACINTRA.3 5
The bankers and some big capitalists argued for a delay in oil exploitation until
inflation was under control. They were in favor of a more open economy, which
included the reduction of barriers for trade and foreign investment. Their view was
supported by the governor of the Central Bank Gustavo Romero Kolbek, and the
Minister of Finance Moctezuma Cid. The most influential businessmen of the country
also favored this view, as did their representative institutions, COPARMEX and the
CCE. COPARMEX and the CCE were in favor of reducing public spending and using
oil revenue to expand non-oil exports.3 6
Notwithstanding the critics, Lopez Portillo opted for the oil export strategy
because he was convinced that this was the best way to achieve rapid economic
growth, restore business confidence, and regain public support. The emphasis was on
exploration and extraction of crude oil, so that Mexico could take advantage of high
international oil prices while they lasted. With time, extraction became the most
important activity.3 7
Aside from Diaz Serrano, the supporters of rapid oil exploitation within the
government included Hank Gonzalez who at the time was the mayor of Mexico City
3 4 Bailey (1989), 47.
3 5 Ibid.
36 Maxfield (1990), 124.
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and an important supporter of Lopez Portillo. The STPRM was also a strong
supporter, as it could sense the economic benefits. CONASUPO and the Electrical
Commission also supported oil expansion, as the expected increase in resources would
provide the patronage necessary for their own clients.3 8
From the point of view of economic theory regarding procyclical fiscal policy,
the route taken by the Lopez Portillo administration in terms of oil development was a
key contributor to the procyclicality of fiscal policy in the years 1978 to 1980. The
development of oil was a major force behind the growth in the economy. But the
strategy also contributed to the increase of the government’s financial deficit and
foreign debt. If the government had followed a more prudent fiscal policy in this
period, some of the problems that later hit the economy would not have occurred. The
approach that the government chose for the oil industry definitely affected government
finances, and accentuated the economic cycle, first making it grow at a faster pace and
then suddenly reducing spending in other to cope with the crisis after 1982.
Since oil is a tradable good and it was under the control of a state company, it
was expected to relieve the economy from both foreign exchange and fiscal
constraints. At the prospect of higher revenues, the public and private sector went on
an investment spree that started in 1978, and accelerated as international oil prices
increased and more oil was found.3 9 This public-expenditure-led growth produced
impressive results in aggregate output, investment, and employment during the four
3 7 Teichman (1988), 63-64.
38 Ibid., 70.
39 See Lustig (1998).
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years of the oil boom.4 0 Table VII.3 shows the relation of oil and the Mexican
economy for the sexenio.
Table VII.3 Oil and the Mexican Economy 1976-1982
1976 1977 1978 1979 1980 1981 1982
Crude production average millions B/day .8 1.0 1.3 1.5 1.9 2.3 2.8
Crude oil exports 1000’s B/day 94 202 365 533 828 1,098 1,492
Oil & products % total value exports 16.8 22.4 29.7 43.8 67.4 74.4 73.6
% Total taxes paid by PEMEX 5.0 8.3 9.6 13.8 24.0 24.9 47.3
Food as % o f value o f all imports 4.0 9.2 8.4 6.9 8.2 9.4 13.1
Food as % o f value o f all exports 35.8 33.7 24.8 20.2 10.1 10.4 9.6
Manufactures as a % of all exports 35.9 34.0 42.0 32.3 19.3 14.4 15.9
Consumer price index (1978 as base) 66.0 85.1 100.0 118.1 149.3 191.1 303.6
Source: Teichman (1988).
Oil seemed to push Lopez Portillo onto a different course than that planned at
the start of his administration. PEMEX director Diaz Serrano had set the goal in 1977
to increase petroleum production from 900,000 barrels per day (bpd) to 2.25 million
bpd by 1982. By 1979 it was apparent that Mexico could indeed exceed this timetable.
At the same time, OPEC had anticipated a gradual increase in oil prices for 1979.
However, prices skyrocketed to $23.50 per barrel in that same year.4 1
Diaz Serrano was very successful in getting full support for his expansionary
program from Lopez Portillo between 1977 and 1980. As a close friend, he enjoyed
direct access to the president that no other member of the cabinet could match and
expedited the expansionary oil development strategy. The success that this policy
40 See Zedillo (1986).
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seemed to have during its first years was a major factor in boosting Diaz Serrano’s
prestige and influence. The strategy even seemed to solve the economic crisis of the
country, especially in the eyes of Lopez Portillo. As oil exports increased, Mexico
abandoned the unpopular 1976 IMF agreement in 1978, which among other things
limited all public-sector external borrowing to US$3 billion yearly until 1979. The
IMF loans were even paid off in advance.4 2
With oil being the center of the economic plan, the power of PEMEX and its
director Diaz Serrano expanded rapidly as he emerged as the second most important
person in the country. PEMEX activities were increasingly important to the Mexican
economy and policymaking. PEMEX had enormous power to borrow abroad as its
share of the public sector foreign debt went form 11.3% in 1976 to 22.6% in 1980, and
to 29.2% in 1981. The government was also expanding its PEMEX expenditures as a
percentage of total government spending, as they increased from 19.4% to 26.6%
between 1977 and 1980.4 3
The opposition charged that foreign loans were dictating PEMEX’s
exploitation and exportation policies. This implied a vicious circle in which loans were
tied to increasing production and exports, which in turn required the devotion of more
resources to the oil industry, and so on. Policymakers argued that the country’s
4 1 Bailey (1989), 49.
42 Teichman (1988), 65.
4 3 Ibid., 66.
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financial problems were short-term, and since an upturn in the economy was
imminent, the necessity of borrowing abroad would decrease.4 4
As one of its main goals was to expand employment, PEMEX was a great
vehicle to help the administration with this endeavor. Between 1976 and 1978
PEMEX hired an additional 25,000 workers, bringing its payroll to about 110,000
workers.4 5 At the same time, the strategy of rapid oil development encouraged
extensive corruption in PEMEX during the oil boom. This added to the overall
corruption in the public bureaucracy that was rampant during the Lopez Portillo
administration. PEMEX’s top administrators believed that adequate control
mechanisms of corruption were secondary, as these would slow down the rate of
petroleum development.4 6 PEMEX was guilty of extravagance, inefficiency, and inept
planning.
The oil workers union (STPRM) was one of the biggest beneficiaries of the oil
boom. It had almost complete monopoly power over labor contracts, other services
and subcontracting to PEMEX. It was claimed that around 85% of PEMEX contracts
were awarded directly rather than by competitive bidding. This inflated labor costs, as
all contracts awarded to private contractors were required to pay 2% into the union’s
social fund.4 7
By 1978 the Mexican peso was considered to be overvalued and this had a
negative impact on indutrialization efforts. Lopez Portillo’s policy of maintaining a
44 Williams (1979), 107.
4 5 Ibid., 110.
46 Teichman, (64).
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strong peso meant subsidizing the price of foreign exchange and the Central Bank
devoted increasingly large sums of dollars to support the peso.4 8 This induced
Mexican consumers to increase their consumption of imports, thus increasing the
deficit in the commercial balance.
The budgets of 1978 and 1979 were influenced by both factions of the cabinet.
Expenditures grew very rapidly, exceeding the levels of the Echeverria years.
Revenues also grew rapidly, but could not keep up with expenditures. This happened,
even though PEMEX revenues as a percentage of public sector income increased from
12% in 1975 to 17.8% in 1978.4 9 Thus, the fiscal deficit grew in absolute terms, but it
was reduced as a percentage of the size of the economy.5 0
After the implementation of tight fiscal measures in 1977 in compliance with
the IMF program and a slow down in GDP growth from 1977 to 1978, almost every
government-spending category showed an increase. Net total transfers by the
government increased 11.24%, federal government wage expenditures increased
7.52%, social and education spending increased 13.95% and 7.94%, respectively. The
government’s primary spending increased 7.8%, behaving more procyclically than the
rest of the spending categories in that period, as the economy bounced back from the
recession of 1976 and 1977, this spending spree by the government definitely helped
the economy accelerate its growth rate to 8.9% in 1978. Economic theory suggests that
the government should have paid back some of its foreign debt instead of spending the
4 7 Randall (1989), 104.
48 Maxfield (1990), 128.
49 Gentleman (1984), 92.
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money or even worse, increasing its debt51, although it seemed under control during
the first years of the sexenio. All of these factors led to the procyclicality of fiscal
policy in this period.
iii.- The Era of Abundance, 1979-1980
After a confirmation of vast oil reserves in Mexico by an international firm,
foreign banks were rushing to make loans to Mexico. As Silva Herzog, Finance
Minister at the time declared, “The money seeks us out and at times it has been
difficult to choose the best offer.”5 2
From 1978 to 1980 the external debt increased moderately, by an average of
3.3 billion dollars a year. This was less than the annual average of US$4 billion during
the final four years of the Echeverria administration. As a result, the external debt as a
percentage of GDP decreased, going from 35.8% of GDP in 1977 to 31.3% in 1980.
The net yearly influx of external debt in the period 1978-1980 in relation to GDP was
2.5%, to public expenditures 7.5% and to the fiscal deficit 35.3%53. The ratio of
external debt to oil reserves declined from 32% in 1976 to 4% in 1982. These numbers
suggest that Mexico’s external borrowing was under control during this period.
In March 1979, the National Industrial Development Plan was announced by
Oteyza, president of the interagency body called the National Commission of
Industrial Development. The plan stated that it would use oil earnings, expected to
5 0 Newell and Rubio (1984), 215.
5 1 Talvi and Vegh (2000).
52 Jesus Silva Herzog (1980).
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exceed US$12 billion in 1980 alone from sales abroad, to propel national growth. See
Tables VII.4 and VII.5 for some facts about oil exports during this period. A major
objective of the plan was to implement an industrial investment strategy consistent
with Lopez Portillo’s goal of increasing employment in the country by 5% a year in
the period 1979-1982.5 4 Oteyza, observed that “it is the first time that the government
has formally and thoroughly come to grips with planning in this field... We are going
to depend on this resource in the short run in order to free ourselves of it in a few
years.”5 5 The plan was highly optimistic, as it forecasted a GDP growth of 9.5% in
1981 and an annual rate of approximately 10% for the rest of the 1980’s. In this way
the Ministry of Patrimony and Industrial Development took the lead in developmental
planning.
Table VII.4 Comparison of PEMEX’s Domestic and Export Earnings, 1977-1982
Year Domestic (%) Export (%)
1977 70 30
1978 58 42
1979 45 55
1980 28 72
1981 22 78
1982 15 85
Source: Gentleman (1983).
5 3 Zedillo. Opcit., 32.
5 4 Looney (1985), 86.
5 5 Excelsior, March 13,1979. In Grayson (1980), 132.
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Shortly thereafter, Garcia Sainz, the head of Budget and Planning (SPP)
announced his global development plan in which the sectoral programs would be
integrated with those of the states and the private sector. However, in May 1979 of
that same year he resigned after being publicly criticized for failing to establish
priority public sector projects. 5 6 His successor was Miguel de la Madrid, a highly
respected technocrat that fit the image of Budget and Planning perfectly because he
was touted as someone who would make the ministry work.
Table VII.5 PEMEX Export Earnings and Share of Total Exports, 1974-1982
Year PMX Exp Earnings
(US$ Billion)
PMX Exp/Total Exp (%)
1974 .123 4.3
1975 .460 8.2
1976 .544 13.1
1977 1.018 24.8
1978 1.887 31.5
1979 3.986 49.0
1980 10.401 65.0
1981 14.585 75.0
1982 16.594 78.4
Source: Gentleman (1983).
In the same month the Minister of Interior Reyes Heroles was fired as Lopez
Portillo was uncomfortable with his independent style in implementing political
reforms. This signaled a retreat from the political openness that the administration had
56 Grayson (1980), 137 and Maxfield (1990), 127.
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226
promised to achieve. His successor, Olivares Santana, symbolized the re-assertion of
the executive in all political matters.5 7
After a first stage of fiscal restraint, the ‘Alliance for Production’ was all but
forgotten as public expenditures reached the highest level of any Mexican
administration at 35.6% of GDP by 1980. This increase in public expenditures can be
explained by the higher investment in PEMEX, but other public expenditures were
also on the rise. Public revenues from oil doubled between 1977 and 1980, but the
public sector deficit was never reduced to the level targeted by the Lopez Portillo
administration. The fiscal deficit was sustained by the rapid expansion of private
consumption and investment, all of which had a negative impact on inflation. In 1980
inflation reached 26.3%, while the exchange rate did not suffer major adjustments.
These conditions, alone, should have been enough for policymakers to grasp the risks
that were approaching.5 8
By 1979, the private sector was the main propeller of growth. Private fixed
capital formation rose from 11.6% in 1978 to 13.2% in 1979. Subsidies and incentives
to the private sector increased in April 1979 according to the National Development
Plan. These incentives and downwardly flexible real wages added to the profitability
of the private sector. The plan also attempted to expand employment, a basic goal, as
this was seen as the most serious of national problems. But massive subsidies for
57 Bailey (1988), 47.
5 8 Ibid., 37.
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energy meant that most investment into fuel and energy was capital intensive and
therefore jobs did not materialize as expected.5 9
The rapid growth of private investment brought new problems to the economy.
Savings remained stable at 18.6% of GDP in 1979, and the gap between private
investment and private savings was reduced to 5.4% of GDP. However, the numerous
subsidies, incentives and transfers undertaken by the public sector to promote private
investment outpaced the growth of government income. Tellingly, domestic tax
reforms had once again been delayed and compromised. The public sector deficit thus
increased from 6.7% of GDP in 1978 to 7.4% in 1979 and 7.5% in 1980. The
government was concerned about the rapid growth in the money supply and the spike
in inflation, so as a control measure it raised the legal reserve requirements of the
domestic banks in 1979 from 37.5% to 40.9%. This led to a decline in the credit
available to the private sector and forced domestic business to look for external
credit.6 0
The increase in private sector investment caused a rise in private sector
imports, since Mexico lacked a capital goods industry to supply investment needs. In
1979 alone, private sector imports rose by 60% at a level of US$8 billion. In 1980
total imports by the government and the private sector were US$32 billion, easily
surpassing the great increase in oil exports. The situation of the commercial balance
became worrisome for the government, since it was clearly not sustainable. Table
59 Luke. Opcit., 54.
6 ,1 Ibid., 56.
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VII.6 shows the balance of payments deterioration that the country was suffering
during these years.
During this time, the Mexican government had been negotiating the country’s
entry into the GATT. But in March 1980 it decided not to join. The negotiations were
favorable to Mexico since the country would be allowed to eliminate its system of
import licenses over a period of 12 years, except on some agricultural goods. Critics of
Table VII.6 Mexico: Balance of Payments 1977-1982 (US$ millions)
1977 1978 1979 1980 1981 1982
Current account balance -1,596.4 -2,693.0 -4,870.5 -7,233.2 -12,544.3 -4,878.5
Total income 9,177.1 11,653.1 16,263.5 24,947.3 30,809.9 28,919.4
Merchandise Exports 4,649.8 6,063.1 8,817.7 15,132.2 19,419.6 21,229.7
Other: services, tourism,
etc.
4,672.1 5,590.0 7,445.8 9,815.1 11,390.2 7,687.7
Expenditure 10,773.5 14,346.1 21,134.0 32,170.6 43,354.1 33,797.9
Merchandise Imports 5,704.5 7,917.5 11,979.7 18,832.3 23,929.6 14,347.0
Other: services, tourism,
etc.
5,069.0 6,428.6 9,154.3 13,338.2 19,424.5 19,450.9
Capital account balance 2,276.0 3,254.1 4,533.3 11,948.3 21,859.6 8,573.9
Long-term capital (net) 4,271.3 4,689.0 4,591.0 6,835.2 11,696.2 10,368.1
Short-term capital (net) 1,995.3 1,434.9 57.8 5113.1 10,163.4 -1,794.2
SDR’s 70.0 73.5 69.6 0.0
Errors & omissions -22.5 -127.0 686.1 -3,647.5 -8,372.7 -8,361.6
Variation in Central Bank
Reserves
657.1 434.0 418.9 1,150.9 1,012.2 -4,666.2
Source: Teichman (1988).
joining GATT pointed out its limits for the flexibility policymaking, arguing, that
Mexico was still not developed enough, that GATT membership would place industry
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229
at a great disadvantage and that small firms would be put out of business. Domestic
critics of GATT entry included influential organizations like the National College of
Economists, the Labor Congress, left-wing political parties and some organizations in
the private sector. The private sector was divided about the issue, with COPARMEX
and the CCE favoring membership, and CANACINTRA strongly opposing it on the
grounds that Mexico would stagnate as an exporter of natural resources.6 1 In general,
big capital was more prone to favor Mexico’s entry into the GATT, but was cautious
about embracing this option. While small capital opposed it in every respect, as they
knew it meant fierce international competition for the domestic market and that it
would be hard for them to gain access to foreign markets.
The labor movement opposed joining GATT, and lobbied strongly against it.
Labor realized that they could share the income of oligopolistic and natural resource
industries, and obtain special profits from nationalized industries, and they used their
power within the PRI to get their desired outcome. Robinson notes that “anyone with
any official standing in Mexico spoke in fulsome terms of the president’s political
wisdom in staying out of GATT, even those who clearly supported entry in the first
place.”6 2
At the same time, Lopez Portillo announced the creation of the Mexican Food
System (SAM). The program was intended as a strategy to achieve food self-
sufficiency. Funds for the different projects included within SAM during 1980 and the
first half of 1981 totaled $4.2 billion, and for 1981 alone, the amount would be $10
6 1 Looney (1985), 90.
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billion. Lopez Portillo wanted the state to be the main promoter of agriculture. Food
exports would be allowed only after domestic consumption needs had been met. The
overall goals of the program were to stimulate production, increase mechanization and
/ - q
expand usable land and irrigation.
The Global Development Plan (PGD) that Lopez Portillo had long sought was
completed in April 1980. The PGD focused on presidential policy decisions already
taken and set out assumptions and details for rapid growth.6 4 The plan also tried to
integrate and modify the National Industrial Development Plan and adopted a more
realistic scenario, reducing the expected growth rates, and assessing the non
competitiveness of Mexican industry in the international market as well as bottlenecks
in key sectors.6 5
The decision not to enter GATT, the creation of SAM, and the announcement
of the PGD, marked a new stage of inward-looking development, where oil would
provide the means to finance another phase of import substitution and support
agricultural recovery. The policy decisions taken during this period (1979-1980) were
based on the assumptions that oil prices would continue to rise and interest rates
would stabilize and then fall in real terms.6 6
In November 1980, the National Energy Plan was announced by the
government. A ceiling on exports of 1.5 mbd was set and, in an attempt to avoid trade
62 Ibid., 92.
6 3 Gentleman (1984), 161.
6 4 Bailey (1988), 46.
6 5 Gentleman (1984), 133.
66 Bailey (1988), 49.
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231
dependency, no more than 50% of Mexico’s oil exports could go to the same country
and no more than 20% of any country’s imports could be provided by Mexico. The
plan established that domestic prices for energy would get closer to international
prices. In this way domestic demand would decrease, as would subsidies. This
decision was widely debated by the liberal and conservative factions of the
government.
The fiscal liberal faction, led by Diaz Serrano, argued for a boost in production
and held that expansionary policies should be implemented in order to finance
development and the mounting deficit in the balance of payments. The fiscal
conservative faction of the cabinet led Finance Minister Ibarra, Planning and Budget
Minister de la Madrid, and Commerce Minister de la Vega and joined by de Oteyza,
accused PEMEX of having become a state within the state that was no longer
responsive to the overall development project. Ibarra told Lopez Portillo, that “there
was a shortage of good projects to spend large amounts of money on” and that “a
slowed pace for oil development would be preferable in order to avoid becoming a net
exporter of capital”.6 7 Diaz Serrano was defeated on his initiative and the National
Energy Plan went ahead. This was a blow to Diaz Serrano’s power and his aspirations
to become a presidential candidate.
In this two-year period, net total government expenditures increased 10.6%,
primary and current spending increased 13.9% and 35%, respectively, while public
wages increased 9.3% and social spending increased only by 5%. From 1978 to 1979
67 Gentleman (1984), 105.
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232
public investment increased 7%, but suffered a decline of 20.1% from 1979 to 1980.
These numbers confirm that the growth in government spending was focusing more on
consumption, while investment was lagging. The money that was entering the country
via foreign loans was being spent at the risk of job creation and sound projects that
would generate the earnings necessary for its repayment. The procyclicality of fiscal
policy rendered any increase in income for the economy as transitory, and cut in to
future consumption. The government was definitely accentuating the economic cycle,
instead of smoothing it.
From 1977 to 1980, the growing income from oil exports, the increase of legal
reserves, and public foreign borrowing enabled policy makers to manage the
macroeconomic variables and to cope with a difficult situation in the government
accounts. In late 1980, however, the government started incurring a quantity of loans
/TO
that exceeded its payment capacity, and the financial problems started to mount.
iv.- The Debt Crisis, 1981-1982
Employment creation was the top priority of the administration’s 1981 budget,
as labor groups mounted pressure on the government, since they felt that job creation
had lagged behind the population’s needs and the amazing growth underway.
Therefore, the government proposed the creation of 750,000 new jobs, representing a
4.2% rise in total employment. Social welfare was another priority, as the budget
reflected a 40% increase from the previous year, with 50% of these funds going
68 Tello (1984), 74.
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toward education. The agriculture sector’s budget showed an increase of 53% and the
industrial sector was to increase by 34%.6 9 The government tried to appease, via job
creation and social spending, the growing discontent that labor and peasant groups
were expressing. This increase in public spending was not what the fiscal
conservatives expected, but the administration, despite these budget increases, still
expressed the goal of controlling inflation. Later in 1981 Lopez Portillo optimistically
affirmed that the goal of reaching a 5.5% the unemployment rate by 1982 had been
achieved in 1980, when unemployment rate was recorded at 3.5%. He also said that
3.25 million jobs were created during 1978-1981.7 0 As can be seen in Table VII.7
urban unemployment decreased with these measures, while GDP rapidly increased.
Table VII.7 Some Relevant Figures for the Good Years of the Sexenio 1976-1981
Year GDP
a.
GDP per
Capita a.
Gross Fixed
Investment
a.
% Urban open
Unemployment
Fiscal
Deficit to
GDP %
Total
external
debt b.
Total
public
debt b.
1976 4.2 1.2 0.4 6.8 9.9 27.5 20.8
1977 3.4 0.5 -6.7 8.1 6.7 30.9 22.9
1978 8.2 5.2 15.2 6.8 6.7 34.6 26.3
1979 9.2 6.1 20.2 5.7 7.6 40.3 29.8
1980 8.3 5.0 14.9 4.6 7.5 50.7 33.8
1981 7.9 5.5 14.7 4.2 14.1 74.9 53.0
1976-1977* 3.8 0.8 -3.2 7.5 8.3 29.2 z l.9
1978-1981* 8.4 5.5 16.2 5.3 9.0 50.1 35.7
1976-1981* 6.9 3.9 9.4 6.0 8.7 43.1 31.1
Source: Lustig (1998).
a. (annual % change)
b. (billions o f U.S. dollars), * average for the period
M Looney (1985), 98.
70 Bailey (1988), 51.
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Beneath the optimism of the oil boom, some cracks had appeared in the
economy. First, as theory explains, resource-based export booms tend to cause
domestic currency overvaluation. The overvaluation of the peso was caused because
the government expected the continuation of high revenues for the future and thus did
not worry about an increasing fiscal deficit. Second, the expectation of future revenues
from oil encouraged a rising fiscal deficit. Third, the overvalued exchange rate,
combined with a large fiscal deficit, led to growing balance of payments
disequilibrium.7 1 Fourth, and most worrisome, was that as the government incurred a
growing fiscal deficit, it increasingly financed it with foreign debt, and the country
was surpassing its repayment capacity as interest rates were increasing. This
ultimately was what prompted the infamous financial crisis of 1982.
During 1980 the fiscal deficit reached 7.5% of GDP.7 2 The situation was not
deemed out of control, as Lustig explains, since the deficit could have been largely
corrected by cuts in subsidies, for example, increasing the price of gasoline as this was
much lower than international prices.7 3 The current account deficit deteriorated
dramatically in the previous years considering the enormous increase in oil exports,
from a little over a billion dollars in 1977 to 14.6 billion dollars in 1981.7 4 However,
imports had grown even more rapidly, leading to a deficit.
7 1 See Table VII.7.
72 See Table VII.7.
7 3 Lustig (1998), 21.
7 4 Zedillo. Opcit., 29.
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By early 1981 analysts were debating the extent to which the Mexican
economy was overheating. There were different views within the cabinet about the
roots of inflation and overvaluation, and the lackluster performance of non-oil exports.
Oteyza and his structuralist supporters were against the banker’s proposal for slower
growth and devaluation, as they argued that the Mexican economy was not
overheated. Along with the banker’s and big capital, other groups that supported
slower economic growth to combat inflation were the Mexican Association of
Exporters and Importers, CONCAMIN, CCE, COPARMEX and CANACINTRA.
Within the cabinet the traditional supporters of this alliance, Ibarra and Romero
Kolbeck, had begun to pressure for devaluation late in 1980, as oil prices fell
unexpectedly in mid-1981.7 5
The decline of oil prices in 1981 took the government by surprise, modifying
the plans that the Mexican government and foreign creditors had for the country in the
near future. It also gave Diaz Serrano’s political enemies the opportunity they had
been waiting for, to secure his exit as director general of PEMEX and of the political
sphere.
After a trip to Europe in May 1981, Diaz Serrano was concerned with the
apparent softness that the oil market was showing. After consulting with his advisors,
he decided that Mexico needed to reduce oil prices to avoid losing market shares.
Lopez Portillo agreed and in early June 1981, Mexico cut its export prices per barrel
7 5 Maxfield (1990), 130.
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below those of OPEC, from $34.60 to $30.60.7 6 The goal, they argued, was to retain
customers. It was predicted that the price cut would mean a $2 billion drop in earnings
and the Finance Minister announced that Mexico would thus require $1.2 billion more
beyond the amount expected in loans for the year. The price cut decision was severely
attacked by de Oteyza and other ministers, arguing that Diaz Serrano had not
consulted with the economic cabinet, that the decision would further undercut world
oil prices and was “cheapening the patrimony of the people”. Diaz Serrano was forced
to resign, and in this way his political competitors took him out of the presidential race
that was approaching. His replacement as general director of PEMEX was
Moctezuma, the close friend that Lopez Portillo had fired as Finance Minister earlier
in his administration. De Oteyza pushed for a hike in the price of oil and Mexico
increased its export price by US$2 per barrel. Subsequently, oil exports were reduced
almost by half, and Mexico had to reduce prices again to regain customers.
Lopez Portillo also followed de Oteyza’s suggestion of correcting the
imbalances of the international accounts by increasing the number of licenses for
imports and augmenting subsidies for exports. He also approved a 14% devaluation of
the peso for the second half of 1981, followed by a 10% devaluation registered during
the first half of that year, a 4% reduction of the government budget, and an increase in
domestic interest rates to encourage savings. Ibarra and Kolbeck continued to pressure
for further devaluation, as the measures adopted by the administration were not
76 Bailey (1988), 52.
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correcting the trade imbalance, controlling inflation, or reducing capital flight.7 7 See
Table VII.8 for a more detailed relation between debt and capital flight.
But the biggest problem that the administration faced was the disequilibrium in
government finances, which had reached crisis proportions by 1981. Government
expenditures and investment continued to increase, but government revenues did not
keep pace. Although a tax reform was badly needed, it did not take place. As the
different interest groups were becoming uneasy with the economic situation and the
government’s response, pressures mounted from every group. The government
responded with continued high subsidies to private investment, and government prices
and service rates lagged behind other prices, trying to appease labor and peasants. All
these added to the deepening problems of public sector finances.7 8 At this point the
GDP growth rate showed signs of decreasing and the government tried to maintain the
growth bubble with debt-backed spending. Interest groups were feeling that although
economic gains at this point could be large, they would be the last ones realized for
some period of time.
The banker’s were the only group that opposed the spending spree at that
point, as they knew that devaluation was near. Since the peso could not be maintained
at the levels that the government targeted, capital flight increased. Giving its continued
access to foreign credit, the government conceded to demands for spending, the result
being that total public expenditures reached 42.4% of GDP by 1981. The financial
7 7 Maxfield (1990), 129.
7 8 Tello (1984), 74.
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deficit almost doubled in one year and the deficit for that year was 14.14% of GDP,
compared to one of 7.4% registered a year before.
Table VII.8 Capital Flight (in US$ million)
Capital
Net Debt Flight B/A
A B
1971
1972
1973 2280 690 30.3
1974 4012 806 20.1
1975 5450 859 15.8
1976 5612 2971 52.3
1977 2876 944 32.8
1978 3344 131 3.9
1979 5520 -7
1980 10891 -251
1981 28014 11828 42.2
1982 8850 6772 76.5
1983 2002 3783 189
1984 1183 1042 88.1
1985 -935 1312
1986 865 -1912
1987 3730 791 21.2
1988 616 3592 583.1
1989 2314 -4226
1990 14722 -3583
1991 19989 -2512
1992 16023 -3829
Source: Gurria (1994).
Initially, the rise in external borrowing had seemed within reasonable limits.
Between 1978 and 1980 total foreign debt increased from US$26.3 billion to US$33.8
billion, see Table VII.8. But the government augmented its expansionary policies, and
the debt continued to grow.7 9 The state’s share of GDP rose considerably, reaching
79 Lustig (1998).
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36% of GDP in 1981, and it would have been higher if price subsidies had not been as
• on
high as they were. Some authors argue that the real figure would probably be closer
to 55% of GDP. The dependence on revenues from state-owned enterprises was
increasing and by 1981 accounted for more than 50% of total government revenues. In
1981 fiscal policy reverted its behavior and was countercyclical as the economy
neared a crisis. The financial deficit easily surpassed the economic growth rate. The
government, as has been explained, did not cut public spending as economic growth
slowed down. Federal government net expenditures increased 19%, and primary
expenditures increased 14.3%. Interest groups tried to capture a share of oil revenues
and external credits, as it was now clear that these would not last forever.
The ‘permanent income’ mindset instilled by the oil boom was one of the main
causes that led to the 1982 debt crisis. As oil prices were falling, Lopez Portillo
continued to think that it was a temporary shock and that oil prices would soon reverse
their downward trend. This optimism would cost the country dearly in coming years,
as events during the next few months challenged the president’s expectations. It is
hard to believe that in September he was still optimistic about the oil market and the
economy. As Luke explains, the flow of future income was choked off by increasing
external debt. This was used to finance an economic program whose defects ultimately
contributed to the economic crisis and financial crash of 1982.8 1 For example, Mexico
experienced a consumption boom, whereas instead those oil revenues could have been
invested in projects that offered a higher rate of return than the interest at which loans
8 0 Gentleman (1984), 138.
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82
were contracted. This is in line with what economic theory would suggest and what
Talvi and Vegh propose in their model.
Total spending by PEMEX for the period 1977-1982 was estimated at US$40
billion. PEMEX received almost 35% of all state investment from 1977 to 1981, a
very high proportion compared to 17.5% during Echeverria’s administration. PEMEX
became the largest investor in the country. This limited investment in other sectors of
the economy. The combination of a higher taxation rate on PEMEX, and increased
production and sales resulted in a huge increase in revenues to the government by the
early 1980’s. By 1982, PEMEX accounted for 10.2% of GDP, while Mexico’s
external debt payments exceeded the US$16 billion that PEMEX generated in
earnings. High import needs by the oil sector were further contributing to the already
high current account deficit.8 3 See Table VII.7.
During the latter part of 1981 foreign debt payments rose under the thrust of
rising interest rates abroad, amounting to US$19 billion that year. By the end of 1981
total foreign debt was US$52.8 billion. The most worrisome feature was that half of
the newly acquired debt was short-term debt, increasing from 4.4% to 20.3% of the
foreign public debt from 1980 to 1981 or US$10.7 billion at the end of 1981. The
short-term debt was contracted with the expectation that oil prices were going to
remain above US$32 per barrel.8 4 By the end of 1981 Mexico’s total foreign public
8 1 Luke. Opcit., 56.
op
Harberger. In Smith and Cuddington eds. (1985).
8 3 Gentleman (1983), 92.
84 Lomeli and Zebadua (1998), 215.
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241
debt as a proportion of GDP was 27.6%, almost 8% more than the previous year.8 5
Another feature of the new debt contracted was that it coincided with rising world
interest rates, which were nowhere near as favorable as during the 1970’s.
Tello argues that around US$6 billion in foreign debt would have been enough
for the government to cover imports and debt servicing. Instead, the government
acquired $20 billion in debt during 1981, and this was mainly used to finance private
sector needs, resulting in capital flight that amounted more than US$11 billion in
1981, see Table VII.9. This invoked memories of what had happened in 1975-76,
when the government contracted debt to support the peso against private speculation.
A rising share of deposits in domestic banks were made in foreign currency, as
the public was afraid of a peso devaluation, further weakening the peso as domestic
interest rates in dollars were higher than on international markets. The maintenance of
higher interest rates was aimed at keeping savings in the country and maintaining the
free convertibility of the peso. But it led to the increasing need for foreign exchange to
cover the government’s financial obligations. Capital flight was again significant in
the last year of the administration, as the local private sector continue to transfer
resources to the international market that eventually came back to the country in the
form of international loans. As overvaluation became more evident to the public,
capital flight increased, rising from $2.5 billion in the first half of 1981 to $8.5 billion
in the second half. During the last 9 months of 1981 capital flight amounted to two-
8 5 Teichman (1988), 113.
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242
thirds of new foreign debt contracted.8 6 Interest rates increases led the big enterprises
of the country to contract foreign credit, as the differential in interest rates between
Mexico and the international system kept getting larger.8 7 This dollar-denominated
debt made Mexican firms vulnerable to a devaluation.
Inflation was getting out of control by the end of 1981 and during the first half
of 1982 it reached 33%, the highest inflation rate registered in Mexico in the post-war
era. Speculation in foreign currency increased as the public expected a devaluation
and wanted to profit from the situation.8 8 The CCE and the Bankers’ Association
blamed the government for not controlling inflation and agreed that this was the major
cause of the financial imbalances now plaguing the country. Big capital was now
skeptical of any action that the government would take, ignoring administration pleas
to stop sending money out of the country.
With the increase in government foreign debt, short-term repayments for 1982
amounted US$10.8 billion, making it very difficult for the country to cover its
international financial obligations. Foreign banks were reluctant to extend new credits,
as the Mexican situation grew increasingly difficult.8 9
In early 1982, oil prices continued the downward trend that had begun in mid-
1981 and capital flight surged. During the next twelve months, nearly half of the
country’s foreign debt would require repayment or refinancing.9 0 The financial crisis
8 6 Tello (1984), 77.
87 See Tello (1984), 52.
8 8 Tello (1984), 64.
89 Gurria (1988), 78.
9 ( 1 Lustig (1998), 24.
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that led to the bank nationalization began in February of 1982, when the peso was
devalued from 26.5 to 46 pesos per dollar, and the Bank of Mexico announced its
temporary withdrawal from the currency exchange market. The private sector agreed
with the decision of devaluing the peso and considered that at this point the situation
was still not worrisome. But the reluctance of the government to impose price controls
allowed inflation to continue its upward trend. Subsequently, the government did
announce an adjustment program to cope with the situation in 1982: a reduction of
public expenditures by 3% without affecting social programs; a strengthening of price
controls to improve the supply of basic goods; the state’s absorption of 42% of the
exchange rate losses that firms would incur after the devaluation allowing them to
defer tax payments; help for medium and small firms with financial problems; and,
flexible interest rates to benefit agriculture and other disadvantaged sectors of the
population .9 1 As Tello explains, the government thought that interest rate increases
and a faster devaluation rate would prevent the dollarization of savings and capital
flight. But the government’s assumption was wrong and those two processes
continued at an even faster pace, along with inflation. The government also provoked
rises in financial costs, import prices, and it contributed to the expectation of further
currency devaluation.
The continuation of industrial development programs by the Patrimony and
Industrial Development Ministry contradicted the implementation of recessive and
restrictive policies. At this time Minister of Finance Ibarra resigned, since he did not
9 1 Aguilar et al. (1982), 13.
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agree with the policies what were being followed, and was replaced by Silva Herzog.
The director of the Central Bank Romero Kolbeck retired and Miguel Mancera was
appointed. All this denoted conflicts and opposing positions within the economic
cabinet that were exacerbated in the first quarter of 1982. The tension peaked on April
20 when Finance Minister Silva Herzog announced the measures that the government
would adopt to control the economic situation and the director of the central bank
came out against price controls.9 2
In fact, the government announced wage increases to compensate for inflation,
which contradicted the goal of maintaining a fixed exchange rate and stable prices,
and capital continued to exit the country. The government intended this measure to
gain support from labor, as the big and small business groups were increasingly
critical and antagonistic. These groups criticized the measure and COPARMEX
leaders declared that jobs would be lost with these kinds of policies. Bailey says that
some observers rightly concluded that political imperatives now controlled economic
policy.9 3 In addition to the government’s intention to reduce the fiscal deficit by 3% of
GDP, which meant an additional 8% decrease in total public expenditures, it decided
to: cut imports by US$6 billion with respect to 1981; limit foreign indebtedness to
US$11 billion for the year; increase public revenues by $150 billion pesos with rises
in public sector prices; run a stricter monetary policy; and to keep close control on
budgets and infrastructure projects.9 4
92 Tello (1984), 91.
9 3 Bailey (1988), 52.
9 4 Ibid.
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The director of the central bank argued against any kind of exchange rate
controls, as this would not stop capital flight and only lead to a further loss of
confidence by the private sector. At this moment the reserves of the central bank were
being depleted. This meant a disagreement between two institutions that were allies in
their approach to fiscal and economic policymaking, and with the big capitalists of the
country. The latter pushed for price liberalization, as costs were increasing and the
government tried to freeze prices. They leaned toward the Central Bank position, as it
seemed that Silva Herzog was complying with what Lopez Portillo wanted for the
economy.
The crisis resulted from an interaction between internal and external
circumstances. Some critics have pointed to the policy errors of the Lopez Portillo
administration as the cause of the 1982 crisis. A too rapid pursuit of the oil export
strategy, a failure to take adequate measures to slow down imports, the maintenance of
an overvalued peso, and the failure to prevent capital outflows were all decisive in the
final outcome of the crisis.9 5 But probably the most costly decision taken by the
government was to continue the expansionist strategy in the face of increasing interest
rates and falling commodity prices, and the negative reaction and loss of confidence
by the private sector to these decisions. The adjustment programs that the government
instituted to deal with the economic crisis failed to ameliorate the situation, as they
were inconsistent, going back and forth from continued expansion to more restrictive
policies.
9 5 Teichman (1988), 111-112.
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The continuation of an expansionist policy on the verge of Mexico’s worst
economic crisis since the great depression resulted in a countercyclical fiscal policy, in
line with economic theory and in my argument. But it is impossible for a government
that has followed a procyclical fiscal policy continuously to try to suddenly reverse its
actions. There were no resources in the economy to continue with an expansive fiscal
policy, the government had not saved in the good times to spend in the bad times. The
government did quite the opposite: it spent over its limits during the economic boom,
increasing its foreign liabilities beyond the country’s capacity of payment, and tried to
continue with this policy after the drastic economic downturn. The problem was that it
did not have the resources to do it, nor the access to foreign credit to finance it. The
result was to further accentuate the financial crisis.
The government defended the exchange rate until August 5, when it announced
the establishment of a dual exchange rate system; hence, a speculative wave swept
through the system. Many people were taking money out of the country, depleting the
reserves of the central bank, where reserves reached a record low. Policymakers did
not expect this reaction by economic agents and scrambled to respond. Dollar-
denominated bank accounts were converted to pesos at below-market exchange rates.
These decisions angered middle class income earners who were most affected by the
conversion, and the government lost direction of the economy at this point. The
government’s policies were full of contradictions, limitations and confusion. The
relationship between the government and the private sector deteriorated, as the
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confidence of the business sector was demolished by the nationalization and other
policy blunders. The days of the ‘alliance for production’ were officially over.9 6
As crisis set in, the dual exchange rate system ended the myth of a free
exchange rate and the long-feared exchange controls were adopted. In August 1982,
Mexico declared a ninety-day suspension of foreign debt payments on the principal
owed, as banks were reluctant to continue lending, and the peso continued to devalue.
Below I review the main contours of the bank nationalization, as this catalyzed a new
private sector opposition that would press for a more cohesive policy response to the
crisis.
v. The Bank Nationalization
In March 1976 a new law was adopted that allowed the establishment and
operation of multiple banking activities. This action promoted the growth of the
biggest banking groups and the further concentration of the system. By 1981 the five
biggest banks owned 75% of the system’s assets. Between 1976 and 1982, 180
banking institutions disappeared or merged with bigger banks.9 7 There was an
increasing asymmetry between the state-owned banks and the private banks, as the
former increasingly relied on foreign loans for their operations and the latter were
operating at the international level, therefore receiving savings in dollars. The bankers’
power increased steadily throughout the sexenio, profiting from the close relationship
they had with Lopez Portillo, and their banks formed powerful conglomerates,
9 6 Colmenares et. al. (1982), 78 and Lustig (1998), 25.
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acquiring interests in industrial, commercial and service enterprises. So the degree of
integration of the entrepreneurial world and the banking system became extremely
close, leading to increasing concern on the part of some members of the cabinet and
Lopez Portillo’s advisors.9 8 The two main opposers to the bankers’ power were de
Oteyza and Tello, who believed that the government should be the unquestioned
leader of the economy and that the bankers or any other group should not have the
power to challenge the government or destabilize the country as they were doing with
capital flight.9 9
Indeed bankers were a powerful group and by 1982 they had considerable
direct access to government through several loyal allies in the state. Mancera, pushed
against exchange controls every time they were considered. Silva Herzog was another
close ally to the bankers who opposed exchange controls. The owner and director of
Bancomer, Manuel Espinosa Yglesias, was described as an ‘unofficial finance
minister’ to the Lopez Portillo government. Agustin Legorreta, director of Banamex,
was described as acting ‘director of public debt for the state’. Carlos Abedrop, director
of Banco del Atlantico, was in close communication with Lopez Portillo. All these
bankers sat on the board of directors of the Bank of Mexico.1 0 0
The government also profited from the banks’ growth and its close relationship
with the bankers. Taking advantage of the introduction of a legal reserve system in
1955, the government forced the banking system to provide funds to the state by this
9 7 Colmenares et al. (1982), 64.
98 Tello (1984), 34.
99 Personal interview.
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means. Private financial institutions were forced under the threat of sanctions, to
provide a great volume of relative cheap credit to the government, therefore making
funds for private lending scarcer and more expensive. Therefore it seems that the
government was limiting the business done by the banks with this legal reserve
system, which reached unrealistic requirements during the Lopez Portillo’s sexenio.
On the other hand, Fitzgerald notes that “the Mexican monetary system of the
stabilizing development based its success on the favorable events of the economy and
the accord between the private banks and the finance ministry to finance a modest
fiscal deficit in exchange for the absence of a fiscal reform.”1 0 1 This point of view
probably overestimates the extent to which the two interest groups had colluded in
ways beneficial for both. What is certain is that Lopez Portillo’s administration took
advantage of this legal reserve system as he used it extensively to finance expenditures
during the sexenio. This was another burden for the bankers as they were stripped of
resources so the government could use them to increase its participation in the
economy.
A few months before the bank nationalization, Lopez Portillo had formed a
group that included Carlos Tello his longtime associate; de Oteyza; Flores de La Pena
the National Patrimony Minister under Echeverria and self-proclaimed socialist; and
his son Jose Ramon Lopez Portillo, the undersecretary of Budget and Planning and
who the president described as “the pride of his nepotism”. The group had been
Maxfield (1990), 147.
1 0 1 In Tello (1984), 42.
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formed to prepare a study of policy options for confronting the financial crisis.1 0 2 In a
personal interview with one of the members of the group, I was told that de Oteyza
and Tello were the only ones who carried out the plan and decided for nationalizing
the banks.
The answer of the Mexican government to its financial problems was to stop
capital flight at all costs, which was undermining private sector confidence in the
government. In August 1982, as the peso continued its depreciation and its variability
increased, bank nationalization was being seriously considered by Lopez Portillo and
his closest advisors, since this meant easier control of capital flight. The memories of
the 1976 crisis were still fresh, where capital flight had put the government up against
the wall and of the mercy of the private sector. Some policy-makers remembered the
run against the peso in that year and the way in which the bankers had defied the
government. Table VII.9 shows the capital flight figures for those years and the net
debt that the government was acquiring. The bankers argued then and continued to
argue in 1982, that to take money out of the economy was not prohibited and that
money did not have nationality. These thoughts angered the nationalist team that was
working closely with Lopez Portillo, as the situation was repeating itself, based on the
enormous power that the bankers enjoyed and what the advisors saw as a lack of social
responsibility.
The group led by Tello and de Oteyza thought that the 1982 bank
nationalization would renew the spirit of national solidarity much needed at that
1 0 2 Maxfield (1990), 143-146.
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particular time. The decision, they argued, would be supported by the labor
movement, whose political weight at the time easily surpassed that of the bankers.
Bank nationalization and exchange controls were old demands from the Mexican left,
the labor movement, the student movement and some intellectuals, but nobody had the
expectation of this happening and the PRI had never even mentioned these issues in its
1982 electoral campaigns.1 0 3 They also thought that the small capital group would see
it as a sign of the government giving priority to their activities over those of the rent
seekers and speculators. But above all the government could destroy what it saw as its
biggest enemy at the time, the Mexican bankers, which in a secular manner had
limited its operational capacity.1 0 4 Also very important for the decision was the PRI’s
view that it would revitalize the image of the Mexican presidency, an idea that would
give Lopez Portillo the boost that he desperately needed at the time.
When a group of government advisors came back from Washington after
negotiating the debt situation with US authorities, and realizing the gravity of the
problem, Oteyza and Tello gave the green light for the bank nationalization and of
exchange controls. Oteyza opposed the exchange rate controls measure, while Tello
was a firm supporter of it. In the end Tello prevailed1 0 5 and Lopez Portillo announced
his decision to the cabinet twelve hours before his address to the nation, asking for the
resignation of anyone who objected. Mancera, head of the Central Bank and Adrian
Lajous, head of the state-owned Foreign Trade Bank, resigned. Silva Herzog also
1 0 3 Aguilar et al. (1982), 13.
1 0 4 Tello (1984), 132.
1 0 5 Personal interview.
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presented his resignation, but as he was deeply involved in debt renegotiations the
President refused to accept it.1 0 6
On September 1, 1982, Lopez Portillo gave his final presidential address. He
criticized interpretations of Mexico’s economic problems by leaders of the developed
107
countries and defended his Global Development Plan, arguing that the economic
growth that the country experienced in the period of 1977-1981 was worth the serious
financial problems it was now experiencing. Mexico could still use the assets,
infrastructure and productive capacity acquired during his presidential term.1 0 8 He
pointed out that the resources created by savings, oil exports and foreign credit had
been taken out of the country by Mexicans and their banks, and in order to avoid this
problem again in the future he announced the nationalization of the banks and the
adoption of an exchange control system on all foreign currency transactions.1 0 9
We have to organize in order to rescue our productive structure and to provide
it with the necessary financial resources for its future development; we need to
stop the injustice of the perverse process of capital flight-devaluation-inflation
that harms every Mexican, especially workers; labor and industries that
generate it. These are our critical priorities. As a response to them I have
expedited two decrees: one that nationalizes the private banks of the country,
and another that establishes the generalized exchange rate controls, not as
reactionary policies, in the sense of better now than never, but until now we
have the proper conditions that are required and that justify these measures. It
is now or never. They have plundered us. Mexico is not finished. They will
never plunder us again.1 1 0
W h Maxfield (1990), 146.
1 0 7 Looney (1985), 94.
1 H K Lomeli and Zebadua (1998), 218.
10 9 Lopez Portillo, Sexto Informe de Gobierno, September 1,1982.
1 1 0 Lopez Portillo, Sexto Informe de Gobierno, September 1,1982.
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The announcement of the bank nationalization shocked the country and the
international community. It represented the most important rupture between the
government and the private sector since the 1910 revolution, and provoked criticisms
from the international financial sector and the multilateral organizations, such as the
World Bank and the IMF. The political left welcomed these policies. Rolando
Cordera, the leader of the left party PSUM, said that with the nationalization Mexico
was in the position to start a new nationalist project adjusted to the current reality of
the country. He encouraged the government to re-think its subsidy-based development
of the private sector. The right-wing political party, the PAN, argued that the bank
nationalization would not resolve the crisis. It criticized the bank nationalization and
described the move as reckless.1 1 1 Even within the government and the PRI, there was
no consensus around the nationalization. Former bankers and large-scale industrialists
worked with the government to pressure, directly and indirectly, for a more moderate
approach.
With the bank nationalization the Banco de Mexico became a superministry,
even more so than the powerful ministries of Finance and Budget and Planning.1 1 2 The
bank would manage the state-owned banking system and continue its regular activities
of formulating monetary policy. Carlos Tello was named governor of the Central
Bank, meaning that one of the biggest advocates of a powerful state would lead the
economic policies of the country once again.
1 1 1 Lomeli and Zebadua (1998), 222-226.
1 1 2 Colmenares et al. (1982), 66.
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In the days following the bank nationalization, Finance Minister Silva Herzog
assured the international organizations and foreign banks, that the decision would not
imply any change in Mexico’s banking operations. Tello, however, affirmed that the
nationalization would mean a change in the banks operating principles. Interest rates
would be lowered and credit would be allocated in accord with socially defined needs.
This reflected the deep political differences between the two cabinet members. As
Maxfield explains, Tello felt responsible for the ‘popular sectors’ that included
workers, peasants, and the lower-middle-class. Silva Herzog was more aligned with
the international and domestic bankers and the business class. Another battle between
the two came up in the process of appointing the new bank directors. Tello wanted to
use the nationalized banks as a tool for economic change. The Finance Minister
refused to continue debt negotiations until objectionable appointees (Flores de la Pena
and Munoz Ledo, among others), were dropped from any possible bank directorship.
At the end the appointees were two former Finance Ministers, many former Central
Bank officials and a variety of technocrats.1 1 3 This might be considered a partial
victory on the part of the bankers.
vi. Conclusions
Lopez Portillo began his presidency with important weaknesses. Some of the
major problems were: the advent of a severe economic crisis; exchange rate volatility
and the first devaluation in more than twenty years; tensions between the private
m Maxfield (1990), 149.
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sector and the administration; societal demands for more representation in
policymaking; and the need to follow certain restrictions in accordance with IMF
guidelines. He managed to consolidate power and launched an ambitious development
strategy before a series of events and policy mistakes devastated the economy.
Bailey points out that when there are weaknesses at the institutional core, and
in the presidency and president himself, the consequences can quickly spread
throughout the system. Lopez Portillo damaged, like no other president, the legitimacy
of presidential governance in Mexico.
During the sexenio of Lopez Portillo, the prominence, importance and
influence of the industrial sector reached new heights. For the first five years of his
government Lopez Portillo showed that he was a good friend of the private sector. His
last year showed a very radical change vis-a-vis this group. As the economic crisis hit
the country he reacted by abruptly devaluing the peso, even though he had declared
that he would “defend it like a dog”. His term ended with some of the policies that the
private sector feared the most, exchange controls, fiscal profligacy, and the infamous
bank nationalization.1 1 4
The policies that Lopez Portillo implemented at the beginning of his sexenio
favoring economic expenditures over social programs and the federal government over
the parastatal sector reverted as his economic priorities shifted, resembling more the
policies followed during the previous sexenio of Echeverria.1 1 5 This shift back to
1 1 4 Story (1986).
1 1 5 Newell and Rubio (1984), 212.
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populism was part of the president’s disenchantment with the private sector, especially
with the bankers, as he blamed them for the economic woes of the country.
The pattern of ‘public-expenditure-led-growth’ produced impressive results in
aggregate output, investment and employment during the first four years of the oil
boom. GDP grew at an annual average rate of 8.4%, total investment increased 16.2%
a year, and urban employment increased 5.7% a year between 1978 and 1981, see
Table VII.8. But the opportunity provided by oil revenues was largely overestimated
and the revenues misused. As a consequence of policies followed during the oil boom,
the government was ultimately less capable of implementing economic and political
initiatives.1 1 6 The administration moved away from its initial six-year plan, as private
banks flooded the country, oil exports increased, and credit was readily available. This
distracted the government from its commitments to financial constraint and
encouraged a more expansive fiscal policy.
There were several factors outside of Mexico’s control that contributed to the
failure of the Lopez Portillo’s administration: the drop in oil prices, the explosion in
international interest rates, and the recession that had begun in the wake of the 1979-
1980 oil price shocks. The continued increase in oil prices through 1980 had
convinced Mexican policymakers that this was a permanent state of affairs, thus they
accelerated spending in the second half of 1980 and the beginning of 1981. By this
time the fiscal deficit had reached 14.1% of GDP, nearly double that of the previous
1 1 6 Lustig (1998), 20.
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year.1 1 7 The continuous misreading of international economic signals aggravated the
situation. Oil prices were projected to remain high, and interest rates were expected to
remain low, but in fact the opposite occurred. Higher interest rates required more
foreign borrowing to service the debt, but as oil prices kept sliding, the country sunk in
a whirlpool of ever-increasing debt.1 1 8 The situation was out control, as the country
was eventually unable to meet its foreign debt requirements, and the Lopez Portillo
economic strategy proved completely ineffectual. The general public was already tired
of the ills of the one party system that had been in place since the revolution, and
pushed for a change on both the economic and the political fronts.
Within the administration, corruption was rampant at all levels. The PEMEX
labor union did little to hide it, as Lopez Portillo protected them, and even accepted a
house in Acapulco from the oil workers union. PEMEX’s inefficiency was notorious
in every aspect of its operation, as the state giant accounted for 34.8% of energy losses
in 1982.1 1 9 The director of the Mexico City Police Department and personal friend of
the president, who amassed a considerable fortune during the sexenio was convicted of
numerous crimes and acts of corruption by the de la Madrid administration. These are
only some of the most obvious cases, but corruption reached scales never before
imagined.
This sexenio can be described as the golden years for the PEMEX coalition.
The labor union profited handsomely from contracts and from the facilities that Diaz
1 1 7 See Table VII.7.
1 1 X Lustig (1998), 21.
1 1 9 Randall (1989), 5-9.
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258
Serrano gave them. The management acquired enormous power and greatly influenced
the economic policymaking arena. The company rose to new heights and became the
main piece of the administration development strategy. During Lopez Portillo’s
administration the benefits of oil were manifested in increasing government
expenditures and through the charging of below market prices for energy supplies that
benefited specific groups. Randall explains that if PEMEX had been allowed to charge
world prices for the products it sold within Mexico, its operating profits could have
almost doubled.1 2 0 Pricing policies were used by the government to achieve its goals.
The biggest beneficiaries were the big industrial corporations and the parastatal firms.
Electricity was also subsidized, but not evenly throughout the country, with
particularly low rates charged in Mexico City. Other subsidies favored development
projects, agriculture and the poor, in contrast to the groups that benefited from oil
subsidies.
The Lopez Portillo government was unable to find the proper path to direct the
new oil wealth that the country had found. These earnings were used to finance an
incredibly high consumption rate by the government and the private sector. But most
importantly, the government wasted the golden opportunity provided by the oil boom
to implement the much needed fiscal reform. The government needed to increase its
non-inflationary financing capacity and to redistribute income to the most needy
classes of the population. Instead, it imposed strict wage controls in the final years of
the administration and let the tax base shrink, while increasing its dependence on more
12 0 Ibid., 53.
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259
regressive indirect taxes. In 1981 government tax revenues only covered 62.3% of
total government expenditures, and the income tax was only 23.2% of those
expenditures.1 2 1
Inflation was encouraged by the excessive growth in demand and an increasing
dependence on higher interest loans. Exchange rate and financial speculation replaced
productive projects, aggravating the already difficult financial situation of the country.
The economic excesses that the country incurred during the oil boom could have been
corrected, although this would have incurred lower growth rates for 1981 and 1982.
The government could not agree in the way to deal with the increasingly fragile
economic situation, as some members of the cabinet supported restrictive measures
and others pushed for continuing growth.1 2 2
This administration showed typical procyclical fiscal policy behavior from
1977 to 1979. As this chapter has shown, this started in the context of an IMF program
launched during the 1976 crisis. The program was followed for a year as the
government implemented strict fiscal policies, holding down government expenditures
and the fiscal deficit. It reduced the fiscal deficit in 1977 as the economic growth
slowed. With the new oil discoveries, the administration abandoned the IMF program,
paying off its financial obligations with the institution and embraced a fast-paced
development program. The new strategy, started in 1978, required the state to increase
its role in the economy. As a result, subsidies and fiscal deficits were high during this
period. In 1978 and 1979, the fiscal deficit increased as the economy recuperated from
1 2 1 Aguilar et al. (1982), 27.
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260
the 1976 crisis and growth returned at a very fast pace. Government spending was
such that every spending category experienced increases until 1982. In 1980 the GDP
growth rate fell moderately while the deficit increased moderately, therefore rendering
fiscal policy acyclical. In 1981 the economy was still growing at a very high rate, but
in this year the fiscal deficit almost doubled, making it a countercyclical year in fiscal
policy behavior. Debt increased abruptly as government revenues were insufficient to
cover the spending spree. But the government failed to halt spending, partly due to the
mounting pressures from interest groups. The latter realized that the economy was not
on track and sought to capture their share of what the government was spending. The
oil bonanza ended in 1982 as oil prices dropped, international interest rates increased
and a debt-immersed Mexico was not able to keep up with its payments. In that year
fiscal policy was again countercyclical and GDP growth rate was negative for the first
time in half a century, but the fiscal deficit kept increasing. This happened because the
government tried to soften the economic downturn, and because interest payments
suddenly absorbed a huge part of the budget. The country was once again in a crisis
situation that required strict fiscal and monetary policies, just like at the beginning of
the sexenio.
Overall the sexenio followed a procylical fiscal policy for the first three years,
an acyclical fiscal policy the fourth year and countercylical fiscal policy during the last
two years. The shift from procyclicality to countercyclicality was not planned, as the
government did not want to change its economic strategy even though the economy’s
1 2 2 Tello (1984), 116.
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261
growth rate declined. The administration treated the economic shocks as temporary
and thus continued spending. But countercyclicality was not planned as an intentional
way of smoothing the economic cycle as economic theory suggests; rather, it was due
to the government’s conviction that oil abundance would continue indefinitely.
The incoming president in 1982, de la Madrid, found himself in the midst of
the worst economic crisis that the country had experienced since the ‘Great
Depression’ of the 1930’s. The state had grown to unimaginable proportions, and now
controlled the banking system. The private sector took a strong anti-state stance after
the events of the nationalization and the application of exchange controls. The
bankers, one of the most powerful groups in the country, were suddenly co-opted, as
they lost their businesses. Big and small capital alike lost confidence in the
government and it was reflected in a decline of private investment. It would take years
for them to regain confidence in the government. The labor sector, which had enjoyed
certain gains during the oil boom, also experienced real wage deterioration in the last
years of the sexenio. Peasants were immigrating to the big cities as it became harder
for them to find ways to make a living in the agricultural sector. Subsidies for this
sector were slashed and agriculture would be as neglected as never before. Again, the
country was facing a highly uncertain future, a situation that seemed to be repeating
itself every six years.
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Table VII.9 Summary of Economic Indicators and Government Expenditures, 1977-1982
Cateqory 1977 1978 1979 1980 1981 1982 Com m ent 1977-1982
Real GDP 3,424.00 3,730.00 4,092.00 4,470.00 4,862.00 4,831.00
1976-1982 increase of
45.86%
GDP Growth % 3.4 8.9 9.7 9.2 8.8 -0.6 8% avq growth 1977-1981
Inflation % 20.7 16.2 20.0 29.8 28.7 98.9
from 20.7% to 98.9%
increase of 377%
Exchanqe R ate pesos/dollar 0.02273 0.02272 0.02280 0.02326 0.02623 0.14850
devaluation of 176% from
1976 to 1981, 466% from
1981 to1982
Interest R ate (Mex Cetes 91 days) 16.64 12.80 18.00 22.50 30.80 45.70
24.4 avg interest rate in
cetes 91 days
Fed. Gov. Net Total Expenditures %
of GDP 15.32 16.54 16.53 18.30 21.79 27.59 Total increase of 80.1%
Fed Gov Primary Expenditures % of
GDP 13.49 14.55 14.68 16.58 18.95 18.49 Total increase of 37.06%
Fed Gov Interest Expenditures % of
GDP 1.83 1.99 1.85 1.72 2.84 9.09 Total increase of 396%
Fed Gov GCU % of GDP 9.72 10.19 10.06 13.76 15.58 22.73 Total increase of 133.85%
G overnm ent Investment % of GDP 1.58 1.86 1.99 1.59 1.52 1.53 Total increase of -3.16%
Capital Expenditures % of GDP 5.60 6.35 6.47 4.54 6.20 4.86 5.67 avg
Transfers % of GDP 1.95 2.08 2.36 2.28 3.93 2.52
1977-1981 increase of
101.53%, 1981-1982
increase of -35.87%
G overnm ent Social Expenditures %
of GDP 7.62 7.66 8.06 8.06 9.17 9.70 8.38 avq
G overnm ent Education Expenditures
% of GDP 3.25 3.21 3.23 3.13 3.59 3.77 3.36 avg
G overnm ent Health Expenditures %
of GDP 3.53 3.52 3.47 3.51 3.67 3.69 3.56 avg
G overnm ent Social Expenditures 166.20 189.40 332.50 360.10 446.40 442.80 Total increase of 166.43%
G overnm ent Education Expenditures 113.50 121.30 133.30 139.90 174.90 182.50 Total increase of 60.79%
G overnm ent Health Expenditures 123.40 133.20 143.10 156.90 178.50 178.40 Total increase of 44.57%
262
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Table VII.9 Continued
Cateqory 1977 1978 1979 1980 1981 1982 Com m ent 1977-1982
Public Sector Acquisitions 122.09 134.09 132.70 146.18 194.51 135.70
1977-1981 increase of
159.31%
Budqetable Current Expenditures 717.24 795.72 874.17 1,054.06 1,243.93 1,278.68 Total increase of 78.28%
Capital Expenditures 213.48 254.82 317.54 347.03 505.18 309.71
1977-1981 increase of
136.64%, 1981-1982 increase
of -38.69%
Fed. Gov. Interest Expenditures 62.01 69.78 74.55 77.03 135.16 348.14 Total increase of 460.6%
Interest Expenditures Total 93.71 105.44 122.56 144.75 222.84 451.84 Total increase of 382.21%
W aqe Expenditures 229.57 244.83 253.29 267.58 298.93 263.89
1977-1981 increase of
30.21% , 1981-1982 increase
O f-11.72%
Budqetable Public Expenditures 930.72 1,050.54 1,191.70 1,401.09 1,749.11 1,588.39
1977-1981 increase of
87.93%
Fed. Gov. Capital Expenditures 91.79 82.62 104.85 107.40 206.30 112.26
1977-1981 increase of
124.78%, 1981-1982 increase
of -45.58%
Fed. Gov. W aqe Expenditures 113.07 121.58 123.75 131.59 146.96 130.89
1977-1981 increase of
29.97%, 1981-1982 increase
o f -10.93%
Current Transfers 122.89 134.15 153.97 204.42 203.65 179.87
1977-1980 increase of
178.53%, 1980-1982 increase
of -40.43%
Net Total Transfers 91.36 101.63 117.26 163.11 121.02 97.16
1977-1981 increase of
65.72%
Public Sector Financial Deficit % of
GDP (6.57) (6.74) (7.40) (7.51) (14.14) (16.95) Total increase of 158%
Public Sector Primary Deficit % of
GDP (2.28) (2.40) (2.82) (3.00) (7.99) (2.51)
Public Sector Operational Deficit % of
GDP (2.71) (3.70) (3.96) (3.60) (10.00) (5.50)
Public Debt Total 22,912.10 26,264.30 29,757.20 33,812.80 52,960.60 58,874.20 Total increase of 157%
Public Debt Lonq-Term 20,185.30 25,027.70 28,315.00 32,322.00 42,206.70 49,548.70
Public Debt Short-Term 2,726.80 1,236.60 1,442.20 1,490.80 10,753.90 9,325.50
O n
U )
VIII. The Lost Decade: De la Madrid (1982-1988)
264
i.- Bringing New Hope to the People
Miguel de la Madrid assumed the presidency at a moment when the country
was facing its worst economic crisis in modern history. Mexico had experienced a
dramatic drop in its growth rate, from 7.9% in 1981 to -0.6 in 1982. The exchange
rate went from 76 pesos/dollar to 148.5 pesos/dollar in that same period. The inflation
rate increased from 28.7% in 1981 to 98.8% in 1982, when the government posted a
fiscal deficit of 17.7% of GDP. Money was exiting the country at an extraordinary
speed. The banking system had been nationalized 90 days earlier. In late 1982, Mexico
was immersed in budget and current account imbalances, and suffered a massive
deterioration in its terms of trade. Mexico had declared a unilateral moratorium on the
payments of the principal of its debt in August, as payments in 1982 represented 23%
of government total expenditures. This led to the suspension of the inflow of foreign
loans and an exchange rate collapse. Mexico was late on US$8,100 of its payments.
All of these factors converged to produce high inflation and economic stagnation.
Politically and socially the situation was not comforting either, as Casar nicely
describes. There was a labor movement upset with its diminishing purchasing power
and growing unemployment, and opposed to de la Madrid’s candidacy. The middle
class had lowered its expectations in terms of social mobility and consumption. A
discredited political bureaucracy was divided as the change from politicians to
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265
technocrats was under way. Finally, the business sector was in a state of shock, shaken
at its core of power and private property by the bank nationalization.1
Lopez Portillo chose de la Madrid to be his successor in 1981 as the country
was on the brink of economic collapse. One of the major reasons for his candidacy
was that as minister of planning and budget, he understood what the president wanted
to hear, and always tried to come up with optimistic news. During the Lopez Portillo
sexenio, the most obvious presidential candidates were left out of the race for many
different reasons, leaving only two prospects by the end of the sexenio. Lopez Portillo
later confessed that if the country’s problems had been mainly political, Javier Garcia
Paniagua at the time president of the PRI, would have been the candidate. But the
most serious problems that the country was facing were economic and hence de la
Madrid was designated as the presidential candidate.2 De la Madrid had no political
experience, as his work had been done on banking and government finances, but he
did have the sensibility to grasp that the political system needed a change and he made
that one of his goals. It was a time for changes, economic, political and social, making
this sexenio, one of transition.
In his presidential campaign, de la Madrid spoke about liberal values,
democracy and the “moral renovation of society”, which people saw as a declaration
of war against corruption. Mexicans responded by voting in high numbers, not for the
PRI, as for the hope that de la Madrid brought to the country. He declared at the
beginning of his term that the medicine to control inflation would be very bitter, but at
1 Casar. In Tello ed. (1989), 67.
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266
the time the Mexican people did not see any other alternative.3 De la Madrid’s
promises were more realistic and encouraged Mexican to work together to overcome
the crisis.
One of the toughest challenges that the de la Madrid administration faced was
the government’s lack of credibility after the successive failures of stabilization
programs launched by Lopez Portillo. Deep tensions had arisen between the
government and the business sector after the bank nationalization, the payment of
mex-dollars4 in pesos at a much lower exchange rate than the one that prevailed in the
market and the establishment of exchange rate controls. All of these added instability
in the country’s financial markets, encouraging capital flight and an inflationary spiral
that seemed to be out of control.5
De la Madrid’s cabinet enjoyed more consensus than those of his two
predecessors. See Table VIII. 1 for a look at the main figures of the cabinet. They
agreed on the causes of the crisis and the measures required to overcome it. The short
run perspectives were that price and financial stability needed to be restored. Medium-
range goals included increasing the competitiveness of the Mexican economy, relying
more in internal than on external savings, and promoting deregulation and institutional
reform.6
2 Castaneda (2000), 45-61.
3 Krauze (1998), 762-769.
4 Deposits in Mexican banks denominated in dollars,
5 Ortiz. In Bazdresch et al. eds. (1992).
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267
Table VIII. 1 Main Figures of the de la Madrid Administration
Person Position
Manuel Bartlett Minister of Interior
Mario Ramon Beteta Director of PEMEX
Hector Hernandez Cervantes Minister of Commerce
Francisco Labastida Minister of SEMIP
Miguel Mancera Governor of the Central Bank
Jesus Reyes Heroles Minister of Education
Carlos Salinas de Gortari Minister of SPP
Bernardo Sepulveda Amor Minister of Foreign Relations
Jesus Silva Herzog Minister of SHCP
ii.- Controlling the Crisis 1983-1984
The new cabinet agreed that the causes of inflation and balance-of-payments
disequilibrium were an excess in internal demand, provoked by a huge fiscal deficit
which reached 15.6% of GDP in 1982, and the misalignment of relative prices due to
the appreciation of the exchange rate. Other factors contributing to the crisis, like the
fall in oil prices and higher world interest rates, were beyond the influence of Mexican
policymakers. Capital flight was seen as a consequence of the crisis and not a cause
like Lopez Portillo had argued. See Table VIII.2 for a brief summary of the major
shocks and debt burden during the sexenio. Some members of the cabinet thought that
6 Lustig (1998), 28.
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268
the inward oriented development strategy had to be abandoned and that it was time to
open the economy.7
Table VIII.2 Debt Burden, Major Shocks and Resource Transfers 1981-1988
Category 1981 1982 1983 1984 1985 1986 1987 1988
External debt tot* 74.9 92.4 93.8 96.7 96.6 101.0 107.5 100.4
External debt Gov* 53.0 59.7 66.6 69.4 72.1 75.4 81.4 81.0
Interest payments* 9.5 12.2 10.1 11.7 10.2 8.3 8.1 8.6
Debt/GDP (%) 29.9 54.2 63.0 55.0 52.4 77.7 76.5 58.1
Debt service/GDP (%) 49.4 62.2 50.4 42.8 43.8 48.6 42.8 43.4
Oil prices ($ per barrel
avg.)
33.2 28.7 26.3 26.8 25.3 11.9 16.0 12.2
% of oil in tot exports 72.5 77.6 71.8 68.6 68.2 39.3 41.8 32.6
US prime rate (%) 18.9 14.9 10.8 12.0 9.9 8.3 8.2 9.3
Terms o f Trade** 126.8 86.1 69.4 70.8 72.4 52.9 67.0 60.5
Net transfers % o f GDP 6.3 7.6 6.8 6.9 4.2 2.9 6.8
Source: Lustig (1998).
* US$ billions
**1970=100
President de la Madrid’s team responded to the crisis with and orthodox
program8 , the Immediate Program for Economic Readjustment (PIRE), in 1983. The
program was conceived in two stages, a shock treatment in 1983 and gradualist
policies in 1984 and 1985. The gradualist policies were oriented towards letting the
market determine the allocation of resources, maximizing production and
employment. According to this new strategy the market would be able to correct
7 Ibid.
8 Aspe (1993) defines orthodox stabilization programs as programs that in general, place greater
emphasis on the administration o f aggregate demand and therefore less importance on the structural
aspects o f inflation. They assume inflation is essentially a monetary phenomenon causes by the
excessive expansion of credit. The way to correct it is by restrictive monetary policy.
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269
economic imbalances, guarantee productive investments, gradually giving private
agents more economic leeway.9
The main goals of the program were to rationalize public finances and lay the
foundations for a healthy recovery in the medium-term. The government believed that
economic stability would be restored by a drastic reduction of the fiscal deficit, via the
reduction of government expenditures and public sector price increases, an initial large
devaluation of the peso and a move away wage indexation. The government signed an
agreement with the IMF, were Mexico could draw on US$3.7 billion between 1983
and 1985.1 0
Following the plan, the peso was devalued and the free exchange rate was set
at 113 pesos/dollar and the controlled exchange rate at 95 pesos/dollar. The
government cut public spending substantially which decreased by 17.3% in real terms
in 1983. Public sector prices, tariffs and taxes increased at the same time.1 1 The
intention of these drastic increases was to create a buffer in real terms, by making
adjustments over what was required to face the subsequent erosion of the increments.
What in fact happened was that real inflation always exceeded the anticipated
inflation.
9 Calva (1993), 50.
1 0 Zedillo (1986) explains that the program presented to the IMF contained basically the same nominal
economic targets as well as those in percentages o f GDP, that had been set in August 1982. This
economic program was elaborated before the economy suffered a series o f shocks during the last four
months o f 1982. This shocks invalidated completely the original forecasts for 1983 in terms o f inflation,
exchange rate, interest rate, GDP, etc. Therefore, the program approved by the IMF and the fiscal
budget o f 1983 were technically incorrect.
1 1 For example: the price o f gas went from 7 pesos/kg in 1982 to 105 pesos/kg in 1986, a cumulative
increase of 1400% for the period; electricity rates went from 1.87 pesos to 19.43 pesos from 1982 to
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270
The government decided to offer exchange rate risk coverage to the private
sector, which was in deep trouble with its foreign debt. The formation of the
FICORCA (Exchange Rate Risk Coverage Trusteeship) meant a commitment on the
part of the government to look after the already restructured private external debt.
Firms could convert their dollar obligations into pesos, and these could be restructured
on a long-term basis. With this mechanism private firms transferred the exchange rate
risk to the government. By late 1983 the agreement had restructured almost US$12
billion in debt.1 2 The fact that the debt protected by FICORCA would be paid to the
Banco de Mexico at a controlled exchange rate created significant differences between
companies which joined the program and those which not. Estimates by SHCP
indicate that those who joined the program enjoyed 3.8 billion pesos of financial
support between 1983 and 1985. The FICORCA was aimed at avoiding the financial
collapse of private sector enterprises, but in the process it became biased toward
certain groups. Big capital was the real winner, in an effort by the government to
regain its support. Only twenty financial groups and major companies accounted for
more than 80% of the resources of the FICORCA trusteeship. The firms that joined the
program were able to avoid bankruptcy and many managed to acquire significant
amounts of liquid assets. In this way the big economic groups that had accumulated
debts abroad were not the hardest hit by the crisis. Some of the big economic groups
that had lost their financial branches in the bank expropriation continued to be
1986 and gasoline went from 20 pesos/liter to 155 pesos/liter. See Baez and Gonzalez, In Tello ed.
(1989), 222.
1 2 Zedillo. In Bazdresch et al. eds. (1992), 47.
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271
important players at the national economic scene.1 3 Smaller businesses suffered the
consequences of a depressed internal market and basically dealt with the situation
without any support from the government.
The de la Madrid team had high expectations for the new program. It expected
to cut the fiscal deficit in half and to reduce inflation from 98.8% in 1982 to 18% in
1985. Output growth would be zero in 1983 and by 1985 it would rebound to 6% a
year. However, the outcome turned out to be much different than projected. Inflation
was only reduced to 80.8%, and output was negative at -4.2% . Inflation did not
respond to the shock program as government prices went up, some subsidies were
removed, and expectations of higher inflation prevailed. In 1983 the government
experienced a spike in its revenues, sales of goods and services being the category that
increased the most, going from 15.94% of GDP in 1982 to 20.6% of GDP in 1983.
Non-tax revenues increased from 5.76% of GDP to 7.56% of GDP in the same period.
The current account had a surplus of 3.6% of GDP, as imports contracted more that
expected. The only variable on target was the fiscal deficit, at -8.61% of GDP.1 4 See
Table VIII.3. As part of the adjustment, gross fixed investment decreased by 25.3%.
The government reduced public investment by 32% in 1983, following a reduction of
14% in 1982. This posed a threat to future production, as the gross formation of
productive capital in the country decreased from 15% in 1981 to 6% in both 1983 and
1984. Government savings in real terms did increase substantially, from -1.2% of
1 3 Garrido and Quintana. In Maxfield and Anzaldua, (1987), 117-118.
1 4 Lustig (1998), 34.
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272
GDP in 1982 to 0.8% and 0.9% for 1983 and 1984.1 5 But as the government deficit
was decreasing, interest payments on external debt remained the same for 1983 and
1984. The government’s current expenditures increased in 1983, representing 82% of
public spending. Most public spending categories suffered cuts, as the government
tried to balance its budget, and reduce inflation. In 1983 public transfers were cut
9.5% if compared to 1982, government capital expenditures declined by 32%,
education spending was reduced 15.4%, and government wage consumption declined
16%. See Table VIII.4.
Table VIII.3 Fiscal Adjustment and Real Exchange Rate 1980-1988
Category 1980 1981 1982 1983 1984 1985 1986 1987 1988
Primary Surplus -3.0 -8.0 -2.5 4.0 4.8 3.9 2.5 5.7 8.4
Fiscal Deficit 7.5 14.1 16.9 8.6 8.5 9.6 15.9 16.0 12.5
Real Exchanger Rate 107.8 90.8 124.2 135.2 110.9 106.8 155.9 169.8 140.3
% of Devaluation -10.5 -15.8 36.8 8.9 -18.0 -3.7 46.0 8.9 -17.4
Source: Lustig (1998).
Table VIII.4 Government Spending 1983-1988
Category 1983 1984 1985 1986 1987 1988
Gov Total Spending* -10.8 -0.3 -1.7 6.9 6.9 -6.6
Social per capita spending* -31.5 -2.1 4.3 -9.7 -6.7 -2.7
Spending on education* -29.9 7.5 2.9 -11.7 2.2 0.6
Spending on health* -21.1 -4.2 2.8 2.9 -7.7 3.8
Transfers** 205.93 172.26 173.86 129.38 91.63 107.92
Public Sector Financial Deficit*** 8.61 8.50 9.57 16.02 16.04 11.71
Source: Lustig (1998).
* % annual change, ** 1980 million pesos, *** % of GDP
1 5 Ros. In Tello ed. (1989), 107-108.
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273
Oil exports peaked in value and volume in the period between 1982 and 1984.
In 1984 the rights that PEMEX paid to the government for the extraction of oil
increased from 26.8% to 31%. This was another means to increase public revenues so
as to reduce the fiscal deficit.
Contrary to the rest of the economy, agriculture was up for 1983 and 1984,
growing at 2.9% and 2.5% respectively, mainly due to the good weather conditions
that prevailed in those years. This happened, even though this sector had suffered a
reduction of inputs and government services to agriculture, in terms of technical
assistance as well as financing.1 6
The external accounts were an important constraint to economic policy making
after 1982, since transfers to the country plummeted. In 1981 these accounted for
7.4% of GDP, while in 1985 they were -5.8% . This meant that Mexico moved from
being a net recipient of capital on the order of US$12 billion per annum in 1981, to
being a net exporter of capital of more than US$10 billion in 1988.1 7 See Table VIII.5
for a summary of debt payments during the sexenio. Here comes very handy one of
Keynes famous quotes, “A government that makes a serious effort to pay its debt,
undoubtedly will fall from power.”1 8 Probably the PRI did not fall from power in those
years, but it certainly lost the support of many loyalist, created divisions among party
members and initiated a serious effort from opposition parties to challenge in
elections.
1 6 Casar, J. In Tello, ed. (1989), 123.
1 7 Aspe (1993), 15.
1 8 Keynes (1978), 55.
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274
Table VIII.5 Debt and Debt Payments 1982-1990
Category 1982 1983 1984 1985 1986 1987 1988 1989 1990
Disbursements** 11.3 10.6 7.4 5.1 11.4 9.8 8.9 5.4 8.1
Amortization** 3.8 6.3 4.4 4.7 11.7 6.9 9.6 6.4 6.0
Total** 7.5 4.3 3.0 0.2 -.04 2.9 -0.6 -1.0 2.1
Interest Spending* 9.09 8.91 7.33 8.90 14.10 17.83 14.63
Capital Flight** 6.8 3.8 1.1 1.3 -1.9 0.8 3.6 -4.2
Source: Lustig (1998).
* % o f GDP, **U S $ billion
The priority of the government was to honor its debt service payments at all
costs. The debt service burden represented 62.2% of export revenues in 1982, while
total foreign debt was US$92.4 billion, meaning currency outflows of about US$10
billion per year. The government’s idea was to maintain its good reputation on
international markets, while also restoring the path of growth to the Mexican
economy. In August of 1983 Mexico completed a major rescheduling of debts owed
(US$23,150 million) between August 1982 and December 1984. At that time, the
international organizations proclaimed Mexico’s stabilization programs a great
success.1 9 The reason for the ‘pay at all costs’ policy was that the government wanted
Mexico to appear as a responsible borrower and thus maintain access to foreign credit.
Mexican exporters supported this policy since they did not want to suffer reprisals
from foreign governments, especially the United States. Besides, the cuts in the
government’s budget did not affect them, since they were oriented toward public
companies, wage earners, and middle class consumers. The exporters were still
1 9 Bazanez (1991), 84.
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receiving subsidized credit, favorable exchange rates and concessions in the
management of foreign currency earnings.2 0
This new economic orientation contradicted the corporatist system that the PRI
had worked with, for so many years. It led to confrontations when de la Madrid
deliberately sought to weaken the traditional political leaders of the PRI. At the same
time, the new economic model signaled the political defeat of the national populist
wing of the PRI and the rise to power of the technocratic faction. The new economic
path was the typical orthodox adjustment strategy, backed with neo-liberal ideas
(economic opening and state retreat from the economy) that cast the state intervention
as the cause of the country’s economic ills. The old politicos started losing ground
right at the beginning of the sexenio, when de la Madrid placed technocrats from his
own group in some of the most important positions of the government. As the sexenio
wore on, the moves he made always favored the technocratic faction that he
represented to the detriment of the old guard of the PRI.
The labor sector was understandably skeptical of the economic policies of the
new administration. Early in 1983, CTM leader Fidel Velazquez, protested in the
name of the workers against the low wage increases that had been authorized by the
government and the fiscal austerity in place. He called for a general strike to pressure
the government and contested the economic measures it implemented. This was the
only group that continuously opposed the ways in which the administration fought
inflation, but it had little success in its efforts. The CTM and the Labor Congress (CT)
2 0 Noguera and Quintana. In Maxfield and Anzaldua, eds. (1987), 123.
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proposed alternative economic and social programs. A number of strikes from
different unions took place in that year. The government showed its unwillingness to
comply with the workers demands or to deviate from the economic path set at the
beginning of the administration. Instead, the government launched a campaign against
labor union leaders, exposing their antidemocratic methods and their illicit enrichment
at the expense of the rank-and-file. This contributed to the further weakening of the
labor movement, as the administration promoted separate wage negotiations for each
91
individual union.
At the end of 1984, Senator Arturo Romo, who had close ties to the CTM,
reminded the president that social peace had been maintained and that the labor
movement had made many concessions to government policies. He emphasized the
imperative to return to the growth path of previous decades and to reduce the social
costs that the population was bearing. He indicated that if the workers had agreed to
postpone wage increases, it was because they understood that such increases could
inflict further deterioration of the economic situation and that they would be the first
ones to pay the costs of adjustment.2 2
For the peasants, the de la Madrid administration meant the end of the populist
discourse of the previous two sexenios as the new economic model would end the
government’s programs oriented toward this sector. The peasant movement
represented by the CNC joined with the workers to pressure the de la Madrid
administration. A number of independent conflicts erupted around the country. Their
2] Perez. In Bazdresch et al. eds. (1992), 47 and Trejo. In Tello, ed. (1989), 20.
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main complaints were the rise in the price of basic consumption goods and
transportation, the cut in subsidies and state support for the agricultural sector, and the
corruption and inefficiency of public servants when dealing with their problems.2 3
Their pressures were disregarded by the technocrats who oversaw this sector, and its
retrenchment continued at a faster pace.
The business sector, still confused about the nationalization of the banks, could
not articulate a consistent and unified political position toward the government. The
crisis came at a time where there was little cohesion among its members.2 4 Espinosa
Yglesias, the former owner of Bancomer, the biggest bank of the country, points out
that in those days all were fighting for their own personal interests and that the losses
at stake varied significantly among different members of the business community.
This was the main reason for their failure to act with unity.2 5
The most radical faction of the business class blamed the government, saying
that the state exceeded its intervention to the detriment of society. They were
especially critical of presidentialism, the single party system, and the corporatist
methods used by the government.2 6 Private actors adopted this very critical position
because, for the most part, they represented smaller businesses that were not receiving
any state help to cope with the crisis. At the same time, they feared the neo-liberal
ideas that de la Madrid’s technocrats brought with them.
22 Trejo. Opcit., 22.
2 3 Basanez (1991), 88.
2 4 Casar. Opcit., 67.
2 5 Espinosa Yglesias (2000), 162.
2 6 Casar. Opcit., 77.
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The de la Madrid administration wanted to demonstrate its ‘moral renovation’,
one of its favorite targets being the oil policy followed by Diaz Serrano. The issue
culminated in the imprisonment of the former PEMEX director. This event
compromised the power and privileges that the oil union (STPRM or Sindicato de
Trabajadores Petroleros de la Republica Mexicna) leaders accrued during Lopez
Portillo’s administration. In January 1984, a decree established that new contracts to
third parties were to be conceded via a competitive public auction, ending a lucrative
form of revenues for the union. The end of the alliance between the union and the state
oil company divided its leaders and gave way to several conflicts. One of the union
leaders, Hector Garcia Hernandez (‘el Trampas’) was accused of fraud and later was
incarcerated.2 7
In another effort to consolidate his presidency, de la Madrid apprehended the
former chief of Mexico City Police, Arturo Durazo, one of the most corrupt figures of
the Lopez Portillo administration. Before naming him chief of policy Lopez Portillo
had been notified by the DEA that Durazo was a drug dealer and a dangerous criminal.
This revealed the levels of corruption and impunity of the previous administration.
To regain the confidence of the private sector, the government offered to
decrease the role of the state in the economy by selling the majority of state-owned
enterprises. A program to divest public enterprises was started in 1983 and continued
throughout the administration. The plan was to divest entities that were not a strategic
priority, such as oil. Public enterprises were privatized, closed or merged. In 1982
2 7 Meyer and Morales (1990), 236.
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there were 1,155 public enterprises and by 1984 they had been reduced to 1,049. One
of the most insistent demands of the business class was that the government sell back
the bank-owned enterprises that had been nationalized with the banks in 1982, but
were not part of the banks themselves. By 1984 the government agreed to begin the
process of re-privatizing the bank-owned enterprises. The government was also
willing to allow the formation of a private financial market to parallel the banks. A
number of subsidies for the private sector were put in practice, including the huge debt
conversion scheme mentioned earlier. But the response of the private sector was not
what the administration had expected: Private investment had contracted by 28.5% in
1982 and by another 36.9% in 1983.2 8
The government issued new regulations for the newly nationalized banks in the
Plan Nacional de Desarrollo 1983-1988, and the Programa Nacional de
Financiamiento del Desarrollo (PRONAFIDE). Both indicated that the banks should
channel credit to a large number of small and medium-sized firms, since one of the
goals of the financial authorities was to decrease the cost of credit and its
concentration among a small number of large corporate borrowers. At the same time
the banks would increase internal savings, reorienting financial flows, and improve the
state’s financial situation. The banks were also to support production, distribution and
consumption of wage goods.2 9
What happened instead was that the concentration of credit grew, rather than
shrinking, as the promoters of the nationalization had hoped, and even worse, non
28 Casar. Opcit., 74.
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bank financial markets began to attract savings at the expense of the commercial
banking system. As a result, the state’s financial situation did not improve with the
nationalization, and the government tried to raise funds through the emission of
government treasury bills (CETES). This reliance on the domestic financial market to
cover the fiscal deficit pushed domestic interest rates up. Inflation eased the cost of the
government’s debt for a while, but other financial opportunities became available to
the public. Thus, the government was forced to raise real interest rate on CETES to
30
unprecedented levels, reaching 9.2% in 1985.
The private sector experienced financial stress as the government financed its
public deficit through the banking system. During this period, legal reserve
requirements increased so as to ensure that scarce deposits to the banking system
landed directly in the central bank and were available to finance the government’s
needs.3 1
In 1983, as the crisis hit the majority of the population, a challenge to authority
started mounting in the north of the country. This was expressed in the renaissance of
the PAN. State elections were becoming more competitive, with popular support to
opposition candidates running at an all time high. The growing independence of the
press, which was tired of being controlled by the state, a critical attitude on the part of
the Church, and the discontent of the business class, all played a role in the tense
political situation. In that year the PAN won some municipal presidencies, including
2 9 Maxfield (1990), 154-159.
3 0 Ibid.
3 1 Clavijo and Boltvinik. In Clavijo, comp. (2000), 264.
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Chihuahua and Ciudad Juarez, the two biggest cities in the state of Chihuahua. After
the PRI governor of that state announced that he could work with a PAN mayor, de la
Madrid visited Chihuahua to publicly reprove him. The president declared that “those
who think that the party of the Revolution is in crisis are deceived.” He had changed
from his liberal start, when he promised a moral renovation of the system, political
opening and democracy, to become a member of the ‘Revolutionary Family’ like most
PRI politicians.3 2
As for the financial scenario, the Mexican Stock Exchange (BMV) began an
ascent not-withstanding the tough economic conditions that the country was facing. At
the end of 1983, with the GDP suffering a contraction of 4.2%, the IPC had increased
to 2,541 points. The index closed at 4,038 points in 1984. This demonstrates a very
different behavior on the part of the financial markets, one that did not match the
economic performance of the country. One explanation for the boom of the stock
market was the selling of stocks of the state-owned enterprises well below their market
value. After being introduced into the stock market, these stocks experienced a huge
increase in their market value and the business groups that were buying them also saw
the price of their stock increase in an unprecedented way. It is estimated that only five
groups (Durango, Eagle Cement Corporation, Vitro, Sabre and Embotelladora
Metropolitana (Pepsicola)) had gained control of more than 25 enterprises sold by the
state.3 4 Later, the introduction of CAPS (Certificados de Accion Patrimonial) that
32 Krauze (1997), 795.
3 3 Basanez (1991), 95.
3 4 Puga (1993), 193.
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corresponded to 34% of the B series of the banks, and which the state sold below its
market price, also fueled these extraordinary gains in the market. One week after their
emission, the CAPS were selling at 240% higher than their introductory price.
Some authors have argued that the events of this period reflect changes in the
economic structure and in positions of power. The new financier group, by gaining
control over the country’s economic surplus, significantly increased its ability to
influence economic policy and the manner of producing and distributing wealth. The
financial developments of these years represented an intense process of redefinition of
the economic and political organization of Mexican society. At the same time, foreign
banks increased their influence in the country and became an important part of the
accumulation process. The IMF agreements that Mexico had been committing to are
an example of the power of this group. The period 1982 to 1985 marked a new
alignment of power, and some of the ex-bankers shifted their interest to other
industries, like commerce and brokerage firms. The government decisively supported
profit-generating financial projects and export sales, and a dramatic transformation of
the productive structure began.3 5
The new financial group and export oriented businesses, together with
government groups that included some members of the old financial bureaucracy and
technocrats who had risen to power in recent years, seemed to be attaining control of
the economy.3 6 Suddenly these groups found themselves in a commanding position in
terms of influencing the government’s decisions and profiting from them. The neo
3 5 Noguera and Quintana. Opcit., 120-122.
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liberal ideas of the government group in power found strong support in these new
strengthening financial groups, which saw market expansion and the arrival of foreign
capital as a juicy source of profits.
Fiscal policy in this period was austere as the economy was going through a
severe recession and one of the government’s main concerns was to reduce its deficit.
The financial deficit was almost halved from 16.95% of GDP in 1982 to 8.61% of
GDP in 1983 and 8.50% of GDP in 1984. Net total transfers were reduced by 30.9%
from 1983 to 1984 as subsidies were cut. Capital spending declined 7.26% in the same
period. One of the few categories of government spending that increased was social
spending which in the period grew 5.26%. In 1983 GDP contracted by 4.2%, a huge
difference from the previous decade. In 1984 the economy bounced back and GDP
grew 3.6%, but this growth did not begin to compensate the losses of 1983.
Hi.- No Results 1985-1986
In 1984, the government decided to reduce the rate of devaluation of the
nominal exchange rate to help control inflation. This led to a real exchange rate
appreciation which affected manufacturing exports, especially during the first months
of 1985. With the protective structure that the country had at the time, many inputs
became unavailable or very expensive to producers. It became clear to policymakers
that the gradual stabilization package would not be able to hold up for long unless
36 Ibid., 124.
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favorable external market conditions emerged. Unfortunately, exactly the opposite
n n
happened.
By 1985 Mexico seemed to be finding its way out of the stabilization crisis:
inflation was down from 101.9% in 1983 to 57.7% in 1985, capital flight had declined
from US$11.6 billion in 1981 to US$0.7 billion in 1985. But the government’s fiscal
deficit increased in 1985 to 9.6%, putting pressure on inflation. These combined with
some unfortunate events. In September 1985 Mexico City was struck with earthquakes
that rapidly changed the prospects for the country. The government, obviously caught
off guard, reacted slowly. As described by Krauze, “as another sign, if one were
needed, of how the system had frozen down to its very heart, the Ministry of Foreign
Affairs proudly announced that ‘under absolutely no conditions’ would they request
-3 0
aid, least of all from the United States.” Close to twenty thousand people died in the
tragedy, and the population was desperately in need of help.
Nevertheless, authorized public spending cuts began in March of 1985 and
continued throughout the year. Tello explains that a slow and clumsy implementation
of every expenditure that was not debt service made public investment in real terms
even less than the already meager investment budget approved for the year. Fixed
public investment as a percentage of GDP went from 12% in 1981 to 6.1% in 1985.3 9
In that year, even though interest rates had increased, deposits in financial institutions
slowed over the previous year, from 27% of GDP in 1984 to 24% in 1985. As
3 7 Aspe (1993), 16.
3 8 Krauze, (1998), 766.
3 9 Tello (1989), 11.
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monetary policy tightened, basically all financing to the private sector was halted. The
exchange rate depreciated 113.6% during 1985, instead of the 28% that was planned
for the year. GDP growth slowed to 2.6% in 1985 compared to the 3.6% growth
registered in 1984.4 0
A new financial law was adopted in 1985 to limit direct financing from the
central bank to the federal government. The role that the stock market and brokerage
firms would have in financing internal debt was defined as increasing amounts of
government bonds (Cetes) were issued. The government’s interest rate policy put the
banks at an enormous disadvantage, as government bonds issued by the brokerage
firms paid higher interest rates than the banks. There was a modification to the
financial laws, approving the participation of private agents in the ‘B’ series of bank
stocks and therefore in their boards.4 1 The government prohibited state banks from
owning brokerage firms, thus limiting their business and denying them access to the
floor of the BMV. In July 1985 the central bank froze banking credit, thereby
eliminating the traditional role of the banks in the economy. Private firms then turned
to the stock market to obtain alternative financing for their business.4 2 These new
mechanisms spurred the development of brokerage firms. At this point the government
was clearly favoring the new breed of financial businessmen that emerged after the
nationalization of the banking system.
40 Ibid.
4 1 Clavijo and Boltvinik. Opcit., 265.
42 Basanez (1990), 98.
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In 1985 import licenses were also reduced, which initiated the acceleration of
trade liberalization and signaled the beginning of the new outward-oriented
development strategy. Before the decree, 90% of domestic production was protected
by import licenses. The deepening of trade liberalization was accompanied by a minor
tariff increase to try to compensate for the reduction of license requirements.
As it became clear that the intentions to open the economy were serious. The
exporting industrialists and the international corporations which controlled part of
their production or were in a position to export immediately allied with the neo
liberals in the government and supported the liberalization of the economy. Williams
explains that while these liberal reforms met with stiff opposition, in some cases the
state employed coercive tactics to implement policy change. For example, the state
busted unions, prosecuted and jailed labor leaders, and even unleashed the military to
quash opposition and implement its new policies. This was possible given de la
Madrid’s huge presidential power, a team committed to reforms, and the presence of
highly trained technocrats in key positions.4 3 In 1985 Mexico rescheduled US$48
billion of its external debt. This included US$20 billion due to be repaid between 1985
and 1990, the more than US$23 billion restructured in 1983, and US$5 billion of new
debt acquired in 1983.4 4
The year 1986 continued with the same restrictive policies that had already
failed. The situation was further aggravated by another oil shock, as prices fell from an
average price of US$11.6 per barrel (with a low in August of US$8.3) opposed to a
4 3 Williams (2001), 7.
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year before when the average price of oil had been US$25.3. This caused a drop in
foreign exchange revenues of almost US$8.5 billion in 1986, 58.1% less than the
amount received in 1985. Although the rights paid by PEMEX for oil extraction had
been increased to 37% in 1985, the abrupt contraction in oil income jeopardized the
finances of the country.4 5 The current account turned negative for the first time since
1983, as oil exports represented 68.2% of total exports of the country in 1985. As the
economy faced the oil shock, an even more austere economic program was launched.
Without access to credit from world capital markets, the decline in oil prices translated
into an inflation rate that reached 105% in 1986 and a deeper recession as GDP
contracted 3.8% over the previous year.4 6 Public investment fell by 16.8% from its
1985 level, as the government adjusted to the contraction of oil revenues. Fixed capital
formation decreased by 12.7% in real terms, private consumption fell 5.5%, industrial
production contracted 5.3% and agricultural production was down by 2% that year.
By 1986 the fiscal deficit was 16.3% of GDP, very similar to that of 1982. The
deficit increase was related to the fall in oil prices and to the high percentage that
interest payments now represented of total public expenditures (34% in 1986). This
component of expenditures continued to grow, becoming the single most destabilizing
element of public finances 4 7 Public expenditures as a percentage of GDP increased in
1985 and 1986, mainly due to these higher interest payments. By 1986 real
44 Gurria (1988), 89.
4 5 Mexico was increasingly dependent on oil revenues. The government used PEMEX as a source
income to finance its expenditures.
46 Meyer and Morales (1990), 234 and Lustig (1998), 39.
47 Tello (1989), 167.
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288
government capital expenditures were half of those of 1981 at constant prices. This
means that public investment increased during the boom and decreased during the
crisis, behaving in a very procyclical way. In 1985 and 1986 current expenditures were
more than 80% of total expenditures, but in 1986 wage expenditures decreased
dramatically as a result of massive reductions in public sector personnel.
Even with the debt restructuring, Mexico transferred an average of more than
8% of GDP abroad from 1983-85 in debt service. During the last quarter of 1985,
many intellectuals urged the minister of finance Silva Herzog to assume a nationalistic
stance while negotiating the debt and to fight for the best interests of the country. Silva
Herzog recognized that the stabilizing policies had already failed to achieve the goals
set for the public deficit, the foreign accounts and inflation. He argued that “the
problem is big, but it does not change the fundamental structures or the attack to the
policies”. For the lack of alternative policy options, and under pressure from the IMF,
he continued them.
In the mean time, the private sector made clear its rejection of the austerity
policies being followed, and joined with the popular claims to renegotiate the foreign
debt and to deeply revise the economic policies followed by the de la Madrid
administration. The CCE argued that the debt payments were wearing the economy
down and needed to be changed immediately. A CONCANACO representative
declared that “the economic objectives were not going to be reached, and that the
causes were not the earthquakes, but the implementation mistakes committed by the
government.” A CANACINTRA representative said that these mistakes had cornered
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289
the country even before the earthquake had hit Mexico. Under private sector pressure
and intense fiscal stress, the government had started selling public enterprises, firing
state workers and eliminating certain sectors of the state apparatus.4 8
The COPARMEX complained that businessmen around the country were
being threatened by the government. The cabinet members that endorsed this tactic
were Carlos Salinas from the SPP, Silva Herzog from SHCP, Hector Hernandez from
Commerce and Manuel Barlett from Government. The reasons for these actions were
that the government did not want businessmen to participate in politics or openly
criticize the administration. This had been going on under the previous two sexenios.
The COPARMEX leader, Emilio Goicochea, said that the situation under de la Madrid
was similar to the kind of repression that the private sector endured during the
Echeverria sexenio. Skepticism about the government only grew since the economic
situation had not improved as it had promised or planned.4 9
Nearly one hundred worker organizations that were not part of the state
controlled unions mobilized behind two main demands: a new development strategy
and the immediate total suspension of debt payments. The workers proposed to
prioritize employment and wages in an effort to maintain their basic needs and
promote social peace. They also urged a fiscal reform that would directly tax
monopolistic capital and offer more breathing space for the middle classes, small
businesses and workers. Other opposition demands included the implementation of
capital controls to impede capital flight; self-sufficiency in food and agrarian reform;
48 Proceso 469 October 28, 1985.
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the reduction of unproductive expenditures and the elimination of subsidies to the
monopolistic capital; a direct fight against inflation, speculation and corruption; and,
effective price controls over basic goods. They also wanted more open participation in
the decision-making process.5 0
In celebration of the 50th anniversary of the CTM its leader, Fidel Velazquez,
took the opportunity to attack the economic program of the de la Madrid
administration. The CTM hardened its demands, but refrained from taking severe
measures to obtain them. The rhetoric was one of independence, autonomy, and
tiredness with the system. The CTM criticized paying the foreign debt as a historical
irresponsibility.5 1
On February 21, 1986, as a way to appease the protests, de la Madrid declared
that his administration was no longer willing to sacrifice the well being of its people
by continuing to send money out of the country via debt service. The country needed
resources, as external financing was unavailable and oil revenues had been halved. In
April, Finance Minister Silva Herzog hinted at the possibility of declaring a unilateral
moratorium. He said that “for the next ten years Mexico will not have access to easy
credit and that the only way to obtain dollars, was through non-oil exports, but that
these were still not enough. Our economic problems are of such an important
magnitude, that Mexico is ready to declare a unilateral moratorium. The negotiations
with the banks and the IMF have not gone far and even worse, they are taking a more
49 Proceso 472, November, 18 1985.
50 Proceso 472, November, 18 1985.
5 1 Proceso 487, March, 3 1986.
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291
C'y
rigid position and the space of maneuvering is getting smaller”. The IMF agreement
had been interrupted in mid-1985 as Mexico failed to comply with its targets, so a new
agreement had to be negotiated soon. This meant that one of the most important
decisions for that year was whether the government would continue the same policy
regarding its debt restructuring.
In April, the Central Bank joined in the criticism against the de la Madrid
administration’s policies. The bank blamed the SPP under Carlos Salinas for a
spending policy that led to a public deficit of 9.57% of GDP in 1985 and that was
expected to reach in 1986 the same dire levels of 1982. At the same time, it accused
the SHCP for being too soft in its approach to economic adjustment. In fact, both were
responsible for making mistakes when preparing the budget projections and hence the
deviation in economic strategy. In a later version of its annual statement the Central
Bank eased its criticism and avoided accusations, blaming the unfortunate external
conditions for the economic deterioration suffered during 1985. Above all, it avoided
blaming de la Madrid’s team for the failed economic policies.5 3
De la Madrid put an end to the speculation around a possible moratorium as
the solution to the country’s economic crisis. Instead he vowed to pursue more gradual
adjustments. This created a crisis in the cabinet since the technocrats in the
administration were intent on maintaining IMF support of their programs. In response,
Finance Minister Silva Herzog resigned, as he opposed the use of international
reserves to repay the debt, as well as the reduction of basic imports, arguing that this
52 Proceso 502 and 503, June 9 and 16 1986.
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292
would completely paralyze the productive system. In July, the government reached an
agreement with its international creditors to renegotiate service on the debt.5 4 The new
agreement conditioned the availability of ‘fresh money’ to the behavior of oil prices,
but did not modified substantially neither the payment terms, nor the interest rates.
The Labor Congress asked the government to respect the people’s interests, to
implement policies that promoted employment and to put an end to the austerity. The
independent labor unions, as well as the parties from the left, requested the end of easy
compliance with the IMF and advocated a moratorium. The Labor Congress asked for
the resignation of SPP minister Carlos Salinas and the governor of the central bank.
Curiously, once Silva Herzog had left the cabinet, in an attempt to gain the favor of
the president, Salinas de Gortari accused Silva Herzog of lacking loyalty and even
called him ignorant.5 5
The changes in the Finance Ministry did not lead to a significant shift in
economic policy. The administration launched a new program, the PAC (Programa de
Aliento y Crecimiento) to regain the confidence of the private sector. The program
offered to reopen credit lines and to increase fiscal stimuli. Businessmen were pleased
with these new measures, but the CTM criticized the government for taking the
economy in the opposite direction of what the union’s had demanded. These economic
policies were not successful, and in the meantime workers had suffered losses in their
real wages, reaching a point where they could no longer tolerate the situation.
53 Proceso 492, April 7 1986.
54 Bazanez (1991), 84 and Proceso 502 and 503, June 9 and 16 1986.
5 5 Proceso 503, June, 23 1986.
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After the oil shock, the government concentrated its efforts on protecting the
balance of payments in the short run, while the medium run goal was to reduce the
country’s dependence on oil earnings. Oil revenues would have to represent a smaller
percentage of export and fiscal revenues. One way to achieve this goal would be to
depreciate the peso, but this would mean higher inflation. In 1986 the controlled
exchange rate depreciated at a much greater pace than the free rate, and by the end of
the year they were about the same. This caused inflation to hit 105.7% for the year,
although Mexico also ran a trade surplus in 1986 of US$4.6 billion and foreign
reserves increased by US$1 billion. Policymakers saw these results as encouraging
and convinced themselves that exchange rate policy, rather than import restrictions,
was a better way to deal with a balance of payments crisis. Authorities also believed
that an undervalued currency would shift production to export products and this would
make economic opening less painful.5 6
As oil prices remained low, PEMEX reduced its budget. This cut in
expenditures was applied to some important areas of the company, like exploration,
exploitation, and the refining and production of petrochemicals. PEMEX director
Mario Ramon Beteta got involved in a war of words with oil workers union (STPRM)
leader ‘La Quina’, creating an uneasy situation between the company and its workers.
In January 1986 de la Madrid had ordered the creation of a mixed commission to
conciliate between the union and the administration of PEMEX and thus end the battle
that had been going on since the beginning of the sexenio. Beteta and La Quina started
56 Lustig (1998), 45.
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firing criticisms at each other, as La Quina accused Beteta of following ill practices.
With Beteta countering that the leaders of the union were irresponsible, and to blame
for the chronic problems that PEMEX faced.
In the agricultural sector, there was a marked decline between 1985 and 1986,
from 2.2%, growth rate to a decrease of -0.5%. Agriculture began to feel the cuts in
financial and technical assistance from the state, reflected in the reduced use of inputs
S7
and services from the government. De la Madrid had argued that the agricultural
sector could compensate for falling oil prices. This would prove difficult, since the
sector had been forgotten for years, as the attention of the government was consumed
by the oil sector. In April 1986 a new program cancelled the distribution of tortillas
and shifted the subsidy to consumption with a coupon system. The program also took
away transfers that the peasants received to produce corn and at the same time reduced
the quantity of coupons received by them, since their distribution to the rural zones
was more complicated than in urban areas. The new program benefited urban workers
rather than peasants, leaving them to their own devices.
Not very convinced by the bank nationalization, economic policy makers were
at a loss as to what to do with the banking system. With more than three years in state
hands it became a decisive element in the continued deterioration of the economy. The
government used the banks to tighten the economy, promoting financial
disintermediation, dollarization and capital flight. The truth was that it was very
difficult for the state to operate the banking system and it quickly became immersed in
57 Casar and Ros. In Tello, ed. (1989), 123.
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bureaucratization and inefficiency, not to mention a sea of complaints by its users.
Businessmen threatened to stop paying their debts to the nationalized banks, if the
latter did not reactivate credit to the private sector. One of the neo-liberal measures
that the administration had adopted to fight inflation was to reduce credit. Criticism
from the private sector increased as the economy did not show any sign of recovery.
Jorge Arrambide, an industrial leader of Monterrey, declared that “The government is
taking all the possible wrong paths. If they leave economic policy to luck, maybe they
would be more successful. People are already tired of technocrats, we want the
politicians back.”5 8 This was a clear sign of the friction that a faction of business was
having with the new dominant group of state technocrats and their neo-liberal
economic strategy.
In 1986 Mexico finally entered the GATT. The man behind this was Hector
Hernandez Cervantes, who was undersecretary of foreign commerce during the Lopez
Portillo sexenio, and minister of SECOFI during the de la Madrid administration. In
the previous sexenio he was defeated in his initiative to join the GATT, but with de la
Madrid he won more support for his neo-liberal ideas. Hernandez explained that under
the current circumstances, as Mexico had changed its import policies, the country was
already operating with a system similar to the GATT. CANACINTRA immediately
opposed the idea as it had done in the past. But the president backed Hernandez’s idea
and took the debate to the senate, where the senators gave their approval for joining
the GATT.
5 8 Proceso 481, January 20 1986.
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Labor leaders opposed the decision intensely (CTM, the labor congress and
some independent unions). Some unions continued their traditional support for the
government, such as the CROM and FSTSE (Federacion de Sindicatos de
Trabaj adores al Servicio del Estado) and without any consultation to their members,
supported the decision. CANACINTRA opposed it, and criticized the government for
the speed of the negotiations and underlined some of the problems that Mexican firms
would face in the future. Business organizations like CONCANACO, COPARMEX
and CCE were more optimistic, as GATT entry represented a better future for the
country.
During the Lopez Portillo administration, the opposition against joining the
GATT had been led by a coalition of labor unions, business organizations
(CANACINTRA, CONCAMIN), the media, public servants, congressmen, political
parties from the left and the National School of Economists, even though its leaders
held public offices in the government (its president was director general of planning in
the ministry of commerce). Some of the highest centers of education also joined forces
to oppose GATT (UNAM, UAM, CIDE, IPN and others). The difference in 1986 was
that there was not a national populist group in the administration to support them from
within the government.
The opposition argued that joining the GATT would hurt Mexican sovereignty,
by making the country susceptible to pressures from the United States and the IMF.
The anti-GATT coalition also invoked the fragility and lack of competitiveness of
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Mexican industry and argued that the disappearance of small and medium firms would
result, along with massive unemployment.
In favor of the GATT were Hector Hernandez and Luis Bravo general director
of import taxes of the commerce ministry, later the undersecretary of SECOFI.
CONCANACO, CANACO, the Mexican Association of Importers and Exporters, and
most decisive were the transnational corporations, big business and modernized
Mexican industries. In short, those firms and groups that were able to export or that
were linked with foreign capital supported joining the GATT. They argued that
modernization of the economy and greater competition would benefit consumers.5 9
Gerardo Galarza compared the two processes of decision-making surrounding
the GATT during the sexenios of Lopez Portillo and de la Madrid and argued “They
were two consultations, one ‘public’, one ‘popular’. The topic: the entry of Mexico to
the GATT. The participants, practically the same people. The postures, substantially
the same. One consultation lasted for fourteen months, the other two. One ended in a
‘No’, the other in a ‘Yes’. Two sexenios, two different wills.” This clearly describes
the approach of the new administration to opening the economy and advancing its neo
liberal agendas as irreversible.6 0 The structural change was under way.
The government expected that, as Mexican products gained access to foreign
markets, this would encourage investment by the private sector. At the same time,
opening the economy would help to control inflation. But the opposite happened.
Many medium and small firms suffered from external competition and went bankrupt,
5 9 Hamilton (1994).
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accentuating the unemployment problem. The group that benefited from joining the
GATT consisted of the big exporters who had become increasingly powerful
throughout the de la Madrid sexenio. This group had ideological bonds with the PRI’s
technocrats and therefore received a lot of support. Both technocrats and exporters
were firm believers in laissez-faire, where the government plays a smaller role in the
economy and lets the market and therefore private actors allocate resources.
The government raised indirect taxes at the beginning of 1986. The fiscal
strategy was clear: to increase revenues without raising key taxes like the earnings tax
or the value-added tax. For years the government had been unable to create an
efficient tax system. The tax system was biased against investment and favored
corporate debt financing. At the same time it suffered from the Olivera-Tanzi effect,6 1
and corporate tax rates were not competitive compared to the United States, Mexico’s
main source of capital. Mexican tax rates were higher and therefore discouraged
investment. In December 1986, a tax reform was introduced which included a change
in indexation mechanisms for interest payments, depreciation, and inventories, and
favored equity rather than debt financing. It brought corporate tax rates close to
international standards and reduced income losses derived from collection lags.6 2
In the stock market, investors were paying between 35 and 45 cents for each
peso of accountable capital in the state companies. The government was selling credit
cheap and creating juicy business opportunities for the private sector. Salinas was the
6 0 Proceso 474, December 2 1985.
fil Tax collection lags represent a loss o f real revenues for the government, when inflation is high.
6 2 Lustig (1998).
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man in charge of the process and had a big disagreement with Labastida, then
secretary of the SEMIP that controlled the state-owned enterprises, as the latter
opposed the selling of some of the paraestatals as well as the methods used for the
selling process. Curiously, Labastida was taken out of the cabinet as he was given the
PRI’s candidacy for governor of Sinaloa. Right after he left his position in the cabinet,
the process of selling state-owned firms gained speed and Salinas enjoyed a much
better understanding with Labastida’s successor at SEMIP, Alfredo del Mazo.
After PAN victories in a few municipalities of 1983, electoral fraud mounted.
The PAN posted comfortable wins in the states of Nuevo Leon and Sonora in 1985,
but the PRI was not yet ready to seriously risk political hegemony. In July 1986
elections for governor in the state of Chihuahua were held. Running for governor for
the PAN was Francisco Barrio, the popular major of Ciudad Juarez. A poll showed
that the voters favored him by three to one, so the PAN’s overwhelming triumph was
imminent, which would have been the first time that a non-PRI governor was elected
since the creation of the ruling party. It was an excellent opportunity for democracy
and the moral renovation that de la Madrid had promised during his campaign, but the
PRI overall was not ready for such change, which would upset internal party forces.
The PRI ‘electoral alchemy’ began, and created its own fraudulent results. The
outcome was a victory for the PRI, as usual. The PAN organized a massive movement
to overturn the results of the elections, but interior minister Manuel Bartlett intervened
and warned the leaders that any disturbances would be met with the forces of public
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order. In one occasion, he even suggested that if there had been fraud, it had been a
patriotic fraud.6 3
In this way, the state continued losing legitimacy and credibility. It would
become harder than ever to win elections or even to obtain illegitimate victories by the
usual methods. People were tired of the PRI’s corruption, and they were willing to
pressure for change.
The business group in Monterrey was divided, as they tried to survive the crisis
by committing to the party and seeking electoral posts. Some went with the PRI and
some others for the PAN. At the same time, there was a huge sentiment against the
PRI in Chihuahua, especially from the business sector. But the leader of the Grupo
Chihuahua Eloy Vallina continued to support the system that had proven to be very
profitable to him and his group, reflecting the divisions between the business sector in
the country.
Referring to the PAN’s challenge to the PRI’s power, Womack argued that
“the PAN would never be capable to govern Mexico, but there are people in
Washington that think that it is, and they put pressure on the system to achieve that
and are trying to prepare the PAN for the eventual crisis that is coming. The Reagan
government is capable of causing almost constitutional problems to Mexico, partly
deliberately and partly due to their ignorance because they think Mexico is a different
country than the one it is in reality”.6 4 International actors were aware of the political
situation in Mexico and the United States’ government, who had been at odds with the
6 1 Krauze (1998), 768.
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de la Madrid administration’s conciliatory foreign policy toward Central America, was
eyeing the PAN as an option for change.
The years 1985 and 1986 saw a turn in some of the government’s fiscal
variables. This behavior led fiscal policy to be countercyclical during these years, the
only two years where fiscal policy was countercyclical during de la Madrid
administration. The financial deficit reversed its downward trend, mainly due to
interest payments on the debt which had been 8.9% of GDP in 1985 and 14.1% of
GDP in 1986. Wages expenditures were cut in this period by 20.79% and current
transfers declined by 25.58%. Social expenditures were reduced by 7.6% in 1986
when compared to the previous year. GDP suffered its second big contraction of the
sexenio when it declined 3.8% in 1986, having grown only 2.6% in the previous year.
So far the sexenio had accumulated a negative GDP growth rate of 1.8% and the
situation did not look promising for the economy or in the political arena. These
pressure groups that were bearing the burden of the crisis were already losing their
patience with the administration and pushing for a change.
iv.- Starting AH Over: The Beginning of the Neo-Liberal Model 1987-1988
In 1987 attention shifted to the political front, beginning within the PRI itself,
as a critical group that demanded democracy began to criticize the behavior of the
party. The leaders of this group were Cuauhtemoc Cardenas, former governor of
Michoacan and son of Mexican icon Lazaro Cardenas who is a symbol of populist
6 4 Proceso 472, November 18 1985.
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nationalism in Mexican history, and Porfirio Munoz Ledo, former minister of labor
and education, and former president of the PRI. Following a conflict regarding the
democratization of the PRI and the politico group’s loss of ground to the technocrats
in key government positions, this new democratic current of the PRI explained that
“technocracy divided the PRI in quotas and made it useless as a political space”. The
PRI lost social and political standing as intolerance, hermetic ways and unquestioned
authority were used to reassert its iron rule. Cardenas and the others left the party, and
formed a coalition of parties that supported Cardenas as the presidential candidate in
the 1988 race. De la Madrid declared “that was where those populists belonged, on the
left, among the people who were dogmatic and sometimes crazy... as far as I am
concerned, let them go, let them form another party”.6 5
In a cabinet meeting Salinas was the person that praised de la Madrid the most
and was reiterative in his promises of loyalty, discipline and work. The other
presidential contenders limited themselves to touting their accomplishments as
ministers and left it at that. After considering Bartlett and del Mazo for candidates de
la Madrid opted for Carlos Salinas de Gortari, as presidential candidate, the minister of
planning and budget and architect of many of the liberal reforms of the period. The
choice did not come as a surprise, since he was the man that ran the economy during
the de la Madrid sexenio. The principal pressure groups realized that they could expect
more of the same policies and the continuation of the neo-liberal model. The president
said the following about his selection: “Salinas has deep patriotism, an active vocation
6 5 Krauze (1998), 769.
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for politics and administrative experience. He is a man that knows well and
profoundly the problems of the country. I have the best opinion about him. He is a
convinced nationalist an honest man with integrity.”6 6
Labor leaders changed their conception about Salinas overnight, now
considering him the ideal man to lead the country. Suddenly they forgot that as SPP
minister he had been the enemy, the one who would not raise wages, and who opposed
their economic demands. The peasant leaders also approved the designation of Salinas
as PRI candidate. On the other hand, oil leaders were not pleased with Salinas’
nomination, as in the past, he had cancelled the concessions they had controlled in
public works and decided that those concessions had to be assigned by competitive
bids. CONCAMIN, without losing time, gave the new candidate a document stating
their problems and asked for some policy changes to avoid a further deterioration of
Mexican industry. They also tried to improve their position with the new candidate, as
CONCAMIN’s president had supported Bartlett in the PRI race and did not want to be
penalized.6 7
For the first time in many years it appeared that it would be a real presidential
race. The third candidate, Manuel J. Clouthier of the PAN was one of Mexico’s most
outspoken business leaders, a former COPARMEX president and the losing candidate
for the governorship of Sinaloa. He had been one of the fiercest critics of the 1982
bank nationalization and also opposed Echeverria’s policies during his sexenio. With
66 Proceso 570, October 5 1987.
6 7 Ibid.
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its broad business constituency the PAN expected to gain full support from the private
sector.
In 1987, the main macroeconomic objectives of the government shifted from
balance of payments protection to price stability and economic recovery. Fiscal
discipline was tightened and, combined with higher oil prices, resulted in an increase
of the primary surplus of the public sector, from 2.5% of GDP in 1986 to 5.7% in
1987, see Table VIII.3. At the same time, the depreciation rate of the peso was slowed
to control inflation. The country finished the year with a GDP growth rate of 1.7%, but
inflation continued, increasing to an all time high of 159.2% in 1987.6 8
The business sector was convinced that economic factors would be decisive for
the presidential succession. They were not satisfied with the economic path that the
country had followed under de la Madrid, arguing that the government wanted to lead
an industrial reconversion, an idea that did not appeal to them. The business sector
rejected the new fiscal reform because it punished tax-payers and described it as too
complicated. They also complained about the lack of respect that the government had
shown to the popular vote in recent elections and tested against official education,
because it promoted conflict between social classes. In turn, the government made a
call to the private sector to invest more, as the new loans promised by the international
organizations had not come to fruition. The administration basically admitted that it
was vulnerable to the requests of the business sector.6 9
6 8 Lustig (1998), 50.
6 9 Proceso 537, February 16 1987.
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La Quina, constantly at odds with the system, became increasingly critical of
different aspects of the administration, PEMEX, and the PRI. His confrontation with
PEMEX director Mario Ramon Beteta became more intense. He said that, like
PEMEX, the country was badly administered and that the legitimacy of the system
was in doubt. He said that the PRI was still the sole political power of the country
because of abstentionism; if the people who did not vote in the past elections were to
vote, he argued, they would oust the PRI. Two of the sectors of the party also joined in
its criticism against the PRI. The CTM and the CCI (Central Campesina
Independiente) accused the PRI of discriminating against them and proposed that the
next president should be decided by the people.7 0 After the PEMEX director was
replaced by Francisco Rojas, who had a friendlier approach to the union, and enjoyed
the support of de la Madrid, La Quina feared that he could lose everything with
Salinas. So he started to show his support for the new candidate and organized a rally
for him at the PRI’s annual convention, where nearly 15,000 oil-workers were present
71
in a desperate move to make amends with the candidate.
In the stock markets and financial sector, there was consensus mixed with
arrogance in the sense that it was not the ‘bolsa’ that would have to adapt to the future
president, but vice versa. The new president would even have to win the respect of the
‘bolsa’, and the market. This was a reflection of the spectacular growth (630%) and
79
outstanding earnings that the market had accumulated so far that year.
7 0 Proceso 534, January 23 1987.
7 1 Proceso 573, October 26 1987.
72 Proceso 570, October 5 1987.
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The Mexican government had consolidated the institutionalization of the
brokerage firms and promoted their growth without obstacles. It offered them
privileges of every kind: tax exemptions, legislation to expand their markets, and the
sheltering of the banking system from any stock market volatility. The financial sector
was also given faculties to be owners of industrial firms, and enabled them to expand
their facilities into areas that were previously only for banks. The outcome was a
sector that became strong, dynamic, arrogant, and capricious. Any intention that the
government showed to intervene or regulate this sector, invoked a violent response.7 3
In October 1987, the Mexican Stock Market collapsed, suffering the worse loss in its
history due to the fall of Wall Street and other major international financial centers,
but also because of administrative errors. This demonstrated that the economic
situation of the country was still far from stable. The uncertainty caused by this
collapse and a monthly inflation rate of 6% resulted in capital flight, prompting a
devaluation in November and leaving the country on the verge of hyperinflation, when
inflation reached its high point of 159.2% by the end of the year.7 4 The Bank of
Mexico could not resist for long the run against the peso and had to exit the market to
protect its reserves. This meant a 35% devaluation of the currency, and increased
interest rates on CETES and bank deposits so as fend off dollarization. Interest rates
went up by almost 20 percentage points in the following weeks, which affected the
economic strategy that the government had planned for 1988. As the stock market
collapsed and did not show signs of recuperating, people sought refuge in the dollar,
7 3 Proceso 573, October 26 1987.
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and more so because domestic interest rates were so unattractive that saving was
deterred.
In late 1986 Pedro Aspe, undersecretary at the SPP, said that there were no
plans for launching a heterodox program, that economic adjustment was still in
process and the circumstances for an alternative program along the lines of those
adopted by Argentina and Brazil were not right. Public expenditures continued to be
the most damaging element of the economic process and therefore the administration
needed to act accordingly. Aspe also mentioned that public investment had to be cut
from some industries that were no longer the government’s priority. Instead,
investment would go toward more profitable sectors for the state, but reduction of the
state’s role in the economy was still essential. He affirmed that there were three
conditions needed for the implementation of a heterodox program 1) a manageable
deficit, 2) public prices on par with private prices, and 3) a competitive real exchange
rate. He assured that after these conditions were fulfilled, it would be possible to
implement a heterodox shock to bring inflation under control. He concluded by saying
that if the government undertook imprudent changes at that time, the social costs
would be high and a deeper recession would follow, and therefore unemployment
would rise.
Ortiz explains that the immediate cause of the inflationary bubble of 1987 was
the delayed effect of the very active crawling peg exchange rate policy followed by
the government after the 1986 oil shock. He argues that this was directly related to the
7 4 Aspe (1993), 19.
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fiscal dimension of the debt problem: as the government faced the problem of
extracting resources from the population to transfer resources abroad to meet debt
payments, different sectors of the population resisted the rise of taxes or public sector
prices. Therefore, the government resorted to the inflationary tax as an instrument to
overcome society’s resistance to this process.7 6
Facing this situation, the government actually opted for a blend of orthodox
and heterodox measures that combined fiscal adjustment with powerful policies to
achieve structural change and combat inflationary momentum. At the same time
public expectations played a major role in the plan, as these had to be adjusted to the
idea of lower inflation. With this, the government made a dramatic shift in its
approach to the crisis after almost six years of failed economic policies. The
macroeconomic circumstances were favorable for fighting inflation, as international
reserves stood at US$14.5 billion in September 1987 and controlled prices increased
20% more than non-controlled prices. This facilitated the use of various nominal
anchors.
On December 15, 1987, de la Madrid and representatives of labor, peasants,
and business signed the Pact of Economic Solidarity (PSE), commonly called the
‘Pacto’. With the announcement of the Pact, the minimum wage, the controlled
exchange rate, and public prices were adjusted upward and they were fixed until the
end of February. The government put a lot of effort into the success of the program, as
the economic cabinet met three times a week with the president. Between December
7 5 Proceso 497, Mayo 12 1986.
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1987 and November 1988 the Follow-up Commission charged with monitoring the
‘Pacto’ held 32 ordinary meetings and 4 extraordinary meetings to supervise the
77
carrying out of commitments outlined in the agreement. The Pact was met with
skepticism by the population, because presidential elections were scheduled for July
1988, and in the last three presidential successions, policies had changed dramatically.
There was uncertainty about the continuation of the Pacto under Salinas. The business
sector thought that the Pact was a small effort, as it was expecting a crash program that
would decisively confront inflation. They saw the Pact as an intermediate posture
between the previous measures and the more drastic measures that they were
expecting.
At year’s end the economy grew by a modest 1.8% of GDP, while the financial
deficit was more than 16% of GDP, making fiscal policy procyclical once again. The
Federal government’s total expenditures increased moderately from 29.06% of GDP in
1986 to 31.27% of GDP in 1987. Interest payments on the debt increased to 17.8% of
GDP, the highest level ever, as social expenditures suffered steep cuts.
In early 1988, oil leaders complained and criticized government measures and
exposed the corruption that prevailed among public servants. La Quina and Barragan
Camacho violently attacked the de la Madrid administration. They argued that the
fight against inflation had been lost, as well as the one against the prolonged crisis.
The leaders also noted that the debt was still very high, and austerity had fallen mainly
on the poorer sectors of the population. This stance marked a definite breakdown
76 Ortiz. Opcit (147).
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between the oil union leaders and the administrations that would cost them dearly
eventually. The oil coalition would never be as influential as it had been in the early
80’s. The break between the PRI’s old guard and the new technocrats continued as
some of the traditional PRI leaders were marginalized and replaced by people close to
Salinas. That was the case of Jorge de la Vega Dominquez, president of the PRI, and
Lugo Gil.7 8
Desperation set in for many sectors as the crisis continued. Farmers from the
northwest took over warehouses from CONASUPO in an effort to pressure the
government to set guarantee corn prices at subsistence levels. They also organized
protests and blocked roads. The prices of the main inputs and services rose as a result
of the Pacto, but not the guarantee prices, which adversely affected producers. Around
the country, workers showed their disapproval of the Pacto with strikes and
79
manifestations, as it was turning out to inflict a heavy burden on them.
The government tried to comply with the promises it had contracted with the
signing of the Pacto, although it did not cut its own bureaucratic apparatus or state-
owned enterprises payroll in any substantial way. There were 4.4 million people
employed by the public sector in Mexico at that point in the de la Madrid
administration, and wage expenditures in this sector reversed the downward trend of
the previous two years. Instead, the government chose to cut investment expenditures
by 11.9% over the previous year, which translated into the suspension or deferment of
77 See appendix 3 for an overview o f the Pact and its chronology.
78 Proceso 585, January 18 1988.
79 Ibid.
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important public works. In a desperate effort to sustain the Pacto, some changes were
made with the Federal Revenues Law for 1988. The tax increases were basically in
taxes for wages, value-added taxes, and the IEPS (a special tax on production and
services).8 0
Under the Pacto central government spending was kept under control and some
spending was reoriented toward social programs. The mild fiscal reform allowed for a
realignment of public prices and fees to international levels. The public sector then
81
entered a process of divestiture of non-strategic state-run enterprises. Real currency
revaluations followed as the exchange rate was fixed and prices continued increasing.
A more restrictive monetary policy was followed and commercial liberalization
measures were put into effect earlier than planned.8 2
In 1988, the first year of the Pacto, government programmable spending
decreased by 8.9% in real terms, as the core of the program was to correct fiscal
imbalances. Capital expenditures and current expenditures by the federal government
decreased 32% and 18.7% respectively in that year. As inflation showed signs of
slowing down, averaging 1.2% monthly in the second semester of 1988, compared
with the 9% monthly average during the same period of 1987, it was possible for the
Pacto to be renewed for longer periods, permitting a more ambitious fight against
inflation. In 1988, minimum wages, public prices, controlled prices and the exchange
rate remained fixed as the fight against inflation increased.
8 0 Proceso 588, February 8 1988.
8 1 Aspe (1993), 27.
8 2 Ortiz. Opcit, 140.
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Inflation decreased from 159.2% in 1987 to 51.6% in 1988. Real GDP grew at
a rate of 1.3% compared to 1.8% in 1987. Private demand grew at rate of 10.9%, while
exports increased only 2.7% compared with 10.1% in 1987. These changes were partly
due to the appreciation of the exchange rate as it was fixed and being used as a
nominal anchor. As the Pacto progressed, some negative signs appeared. Very high
real interest rates prevailed in 1988, in some periods reaching almost 40%.
International reserves decreased through the course of the year. The current account
deteriorated as private expenditures increased, high world interest rates prevailed and
o-2
the permanent effect of the economic opening was felt.
Nevertheless, the Pacto enjoyed better results than the orthodox stabilization
program of 1983. Inflation reduction was larger, GDP growth was positive, and real
wages fell considerably less than in 1983. Sufficient reserves (about US$14 billion)
allowed the government to sustain a fixed exchange rate, while reducing import tariffs
and at the same time experiencing growth in demand and output. Experts argued that
the economic conditions for a program like the Pacto had prevailed at least since late
1986 and that delaying its implementation only caused greater income losses for the
population.8 4
As we have seen, total government spending declined consistently during de la
Madrid’s administration as this was the main way in which the government sought to
reduce its fiscal deficit, which declined by 6.8% between 1983 and 1988. But in reality
not all expenditures were reduced in the same proportion. In order to achieve its fiscal
8 3 Ibid., 142.
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goals, all categories of public expenditures were reduced, with the exception of debt
payments, which rose by 29.6% between 1983 and 1988, and finished that year
representing 14.6% of total federal government expenditures. The share of
programmable expenditures8 5 in government’s total budget was reduced from 80% in
1980-81 to 54.3% on average from 1983 to 1988, while social expenditures (mainly
education and health) declined by 33.1% in the same period, suffering greater cuts
than total programmable expenditures. Spending on education and health fell by
29.6% and 23.3% respectively during this period.8 6
One category of programmable expenditures that also suffered cuts was public
sector wages, which went from 7.6% of GDP in 1982 to 5.7% in 1987, even though
the number of employees in the federal government and the parastatal sector grew.
This means that wages underwent substantial cuts during the sexenio and that the
government was acting as a buffer for unemployment.8 7
As part of the neo-liberal initiative, the minister of commerce constantly
advocated for the removal of subsidies on basic foods. This was a real threat to
CONASUPO, since subsidizing basic foods was its main function. The director of the
institution, Jorge Ernesto Costemalle, argued that CONASUPO’s policies were sound.
Nevertheless, transfers to CONASUPO, the state store for the popular classes, were
reduced substantially between 1984 and 1988 by 65.1% in real terms. By 1987 only
8 4 Lustig (1998), 51.
85
' Government expenditures excluding interest payments.
8 6 Lustig (1998), 79.
8 7 Peres. In Bazdresch et al. eds. (1992), 54.
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QQ .
corn and milk remained subsidized. This means that a growing population was
receiving less resources from the state in areas felt most by the lower classes.
Throughout the sexenio the corporatist relations between the state and its
various sectors deteriorated as a result of the crisis. The lack of resources prevented
corporatist operatives within the PRI from delivering social goods to their constituents
and they lost credibility, support and authority, all of which were essential for the
control mechanisms on which the system had been based. By 1988 real wages were
50% below their 1981 level, and the number of people employed in Mexico was less
than the number registered in 1982, prior to the crisis. These losses would have been
even more dramatic if workers had not accepted reductions in their real wages under
the Pacto or the flight into million of informal jobs.
Recognizing this deterioration, de la Madrid talked about Mexico entering a
phase of ‘integral democratization’ and strived to regain some support from the
masses by bringing democracy into his discourse and placating the labor sector with
political rhetoric, so as to distract from the economic failures of his sexenio.8 9
Although tax policy saw some changes during the sexenio, the structure of the
system remained basically the same. Direct taxes, which progressively tax the rich
more than the poor, declined, while indirect taxes, which are the same for all
consumers, and thus more regressive, gained in importance.9 0
88 Martin del Campo and Calderon. In Bazdresch et al. eds. (1993), 107.
89 Crespo, 1992. In Bazdresch et al. eds. (1992), 28.
90 Tello (1989), 170.
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As the process of divesting the public enterprises continued, by the end of de la
Madrid’s administration there were only 412 public enterprises, compared with 1,155
in 1982. The strategy of privatization was to sell smaller firms and then continue with
the larger and more important ones, which would be sold by the next administration.
The 1988 election was the most contested one in the history of Mexico. The
democratic events of the 1980’s like corruption scandals, power abuse, and perpetual
economic crises had changed the political culture of the population. The voters
punished the PRI by exiting the party, and the coalition led by Cuauhtemoc Cardenas
received strong support at the ballot box. In the end, the PRI’s alchemy was once
again put to work under the leadership of Bartlett. The computing system used to
count the votes allegedly failed, when it became clear that Cardenas might win, and
the triumph of Salinas was pronounced.
During the last few months of the de la Madrid administration, some of the
people inside the business group strongly supported the government’s effort to
succeed with the Pacto, as the most important members of the private sector sought to
maintain a high profile in the coming sexenio. They joined the PRI and actively
participated in the Salinas campaign. This group’s relationship with the government
became tighter than ever before and some of its leaders like Vicente Bortoni from
CONCAMIN, Jorge Kahwagi of CANACINTRA, and even the CEE’s Agustin
Legorreta were considered almost as emissaries from the private sector as they showed
active support and participation in the Pacto.
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But this was not enough to secure full PRI dominance over the 1998 elections.
The regime of one dominant party with absolute power basically came to an end with
the July 6 elections. The PRI lost its dominance in the main cities of the country and
among the traditionally loyal groups within the system. The only sector of the
population that remained loyal to the PRI was the peasants, as even the labor sector
withdrew its support. Mexican labor specialists such as Francisco Zapata and Ivan
Bizberg have noted that incumbent administrations begin to show favor to the CT and
CTM as elections get closer, as in the case with de la Madrid. But this time, Fidel
Velazquez, the CTM’s long time labor boss, proved to be out of sync with his base
members and even obsolete. The CTM of the past that guaranteed the control of the
workers and contributed substantially to the PRI’s electoral triumphs, could not
deliver on this occasion. Velazquez was not able to secure victory for his own
candidates, which was confirmed by the list of losers amongst the most significant
leaders of the union. Two of the most visible cases were Joaquin Gamboa Pascoe, a
close ally of Salinas who unsuccessfully ran for the Senate and Arturo Romo the
leader of the CTM in Mexico City.9 1
In 1987 problems continued as interest payments on the debt represented a
record 17.83% of GDP in 1987 and the financial deficit of the government was over
16% of GDP. In 1988 interest payments on the debt declined to 14.63% of GDP and
the financial deficit of the government was reduced for the first time in four years to
11.71% of GDP. The federal government’s net total expenditures saw a reduction of
9 1 Proceso 611 July 18 1988.
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18.76% by 1988. Current expenditures as a percentage of GDP declined by 15.82%,
from 28.06% of GDP in 1987 to 23.62% of GDP in 1988. Government investment
declined from 1986 to 1988 by 50.46% and government capital expenditures went
down 37.7%, while social expenditures declined 7.31% in that same period. This was
a complete blow to future growth. GDP grew moderately in 1987 and 1988, at rates of
1.8% and 1.3%, respectively. The big story of these years was that inflation went from
a record 159.2% in 1987 to 51.7% in 1988. Spending restraints aided by the Pacto’s
heterodox policy approach were proving to be effective. Procyclicality in fiscal policy
also returned to the scene in these two years. In 1987 the GDP growth rate accelerated
and the fiscal deficit increased. While in 1988 both variables decreased from the
previous year. This means that the government continued to spend money following
variations in the economic cycle, instead of trying to smooth it. Pressure groups
continued with their in an on pressures as they noticed movements in government’s
collections. The big winners of the sexenio were the big capitalists. The losers were
the oil coalition, as it got practically dismantled; the workers as they were bearing
most of the adjustment costs and their leaders were more ineffective than ever as they
had lost influence in the government, and the peasants who saw a huge reduction on
the subsidies that they received. The government definitely took too much time to
cope with the crisis and this had an enormous effect on the economy and the position
that the interest groups held, as it was easier for the big capital to deal with inflation
and the restrictive fiscal policy that characterized the sexenio.
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v. Conclusions
The stabilization programs implemented between 1982 and 1987 were
characterized by three main parallel policy packages in order to control inflation: 1)
The reduction and eventual elimination of the fiscal deficit via the contraction of
public expenditures, the increase in public revenues through taxes and the rise of
public sector prices, and the sale or liquidation of state-owned enterprises; 2) The
contraction of internal demand, both through the above mentioned policies and the
decline of wages and a hardening of credit restrictions; 3) The reduction of pressures
on the balance of payments by maintaining commercial and current account surpluses
through a depreciating peso, high interest rates and export promotion.9 2 These anti-
inflationary policies had devastating contractionary effects on production, employment
and investment, without entirely stabilizing prices. All of these factors contributed to
the labeling of this period as the Tost years’ where GDP grew at an average rate of
.21%, in contrast with the 8% yearly average posted from 1977 to 1981.
With the signing of the Pacto in late 1987, a new strategy was conceived. It
maintained the first two policies, but the third was dropped, as the exchange rate was
fixed to a certain extent, and the economic opening was accelerated. Establishing
inflationary expectations determined ex-ante by authorized increases in wages, and the
abandonment of commercial and current account surpluses financed by external
savings were the new anti-inflationary strategies.
92 Calva (1993), 45.
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The 1982 crisis forced changes in state administration and it gave the de la
Madrid government an opportunity to make other adjustments that were badly needed.
After this administration, the Mexican economy and political system would never be
the same. Fiscal policy and administrative reforms, decentralization, divestiture of the
state from the productive system, and economic opening became the main elements of
public sector reform during the sexenio.
The financial deregulation that Mexico went through made speculation a
profitable business, but few players took advantage of the situation: only 0.74% of the
population participated in the stock market, according to Calva.9 3 Only large
capitalists had access to financial markets, while the majority of the population was
left without any means to cope with the crisis.
Fiscal policy during the sexenio was used to contract internal demand, further
deepening the crisis. The government basically reduced expenditures in almost every
category of public spending, which it could control. Debt interest payments increased
however, because these were not determined by the government. Public investment
was one of the most affected areas, as it decreased by 43.8% during the sexenio, a
sacrifice for the future development of the country, since investment is an essential
variable for any economy to achieve growth. Capital expenditures contracted by
52.49% from 1983 to 1988 and averaged only 3.16% of GDP. Social expenditures
averaged 7.93% of GDP during the sexenio, a 5.39% drop over the previous
administration.
9 3 Ibid., 57.
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Subsidies were another category that suffered major cuts and by 1986 only a
few products remained under the tutelage of CONASUPO. Current transfers declined
by 47.6% from 1983 to 1988. Wage expenditures also suffered downward adjustment,
as they declined by 22.17% during the de la Madrid administration. At the same time,
the main economic variables did not improve over the first five years of the
administration. The public sector financial deficit was still at the 1982 level of more
than 16% of GDP, and inflation reached an all time high of 159.2% in 1987. While the
economy was still not showing any signs of growth, another deep crisis that hit the
country in 1987.
Currency devaluations were costly, as they affected the terms of trade, and
economic opening made the adjustment more severe. The sacrifices made by the
population in those years seemed to be in vain. The economy failed to grow since all
the resources that were generated through a surplus in the balance of payments went
toward debt payments. The policy of paying the debt by reducing internal demand
proved an ineffective approach to the problem. It enabled Mexico to produce the
surpluses needed to make external debt payments, but production fell as restrictions in
the internal demand forced a decline in consumption. So the burden of the debt
increased, with interest payments equivalent to more than 17% of GDP in some years,
while the economy did not grow at all.9 4 The nickname of Tost sexenio’ or ‘sexenio of
zero growth’ is thus well deserved.
9 4 Brailovsky. In Bazdrezch et al. eds. (1992), 109.
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Brailovsky argues that fiscal policy exacerbated inflation and this was very
harmful to the fiscal deficit, as the government tried to uphold strict nominal financial
requirements: taxes were raised, subsidies were cut and public sector prices went up.
As internal debt was considerable and growing, inflation accelerated the cost of
interest payments disproportionately to the new revenues coming in from higher
public prices. In this way, new cuts to public spending and higher prices had to be put
into practice.9 5
The neo-liberal economic policies implemented during the de la Madrid
administration and the chronic attempts at economic adjustment, inflicted significant
social damage to the most needy classes of the Mexican population. Clearly workers
bore the burden of the crisis. The policy of holding wages below inflation and the
failure to create new jobs during the sexenio caused an unprecedented deterioration of
wages as a percentage of GDP. Official unemployment figures are a problematic
indicator of this hardship. Wages lost more than 50% of their real value, representing
only half of the 1982 level by 1988. The only recourse workers had was to find
alternative sources of income, in many cases taking on more than one job. The middle
class was also hit hard by wage reductions, since it derives around 50% of its income
from wages.9 6 The steady devaluations during the sexenio also shifted income in favor
of the richest groups. Reduction of the fiscal deficit via cuts in government
9 5 Ibid., 114-15. This process comes from the difference that when inflation increases from 20% to
100% and interest rates do the same, interest payments would increase five times, while prices would
only double in nominal terms.
9 6 Lustig (1998), 73.
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expenditures (i.e. elimination of subsidies, cuts in social spending) and tax increases
also contributed to this process.
During the de la Madrid administration economic policy was more than ever
defined from above, and the population, although a mere spectator of the decision
making process, suffered from the mistakes of policymakers. What is astonishing is
that this economic mismanagement occurred without social unrest. Instead, voters
displayed their wrath at the ballot box. Overall, interest groups were not effective with
their pressures, or their pressures were not strong because there was no money in the
economy at this crisis time. This reaction by interest groups neatly fits into Talvi and
Vegh’s explanation of the procyclicality of fiscal policy. There were no incentives for
groups to waste resources in pressuring the government.
Smaller entrepreneurs were also big losers during the sexenio, as privatization
and preferential pricing policies benefited a very specific group of the private sector:
big capital, the new financial groups, foreign banks and those transnational
corporations that were able to cash-in huge profits. The economic opening also
favored a select group of exporters who were able to take advantage of recently
opened markets. The majority of domestic businesses were adversely affected, as it
was very difficult to modernize industries and prepare them for foreign competition,
under an economic scenario that included high interest rates, an overvalued peso and
deep public spending cuts.
Overall, the main victims of the crisis and the subsequent stabilization policies
were the traditional allies of the PRI, everyday workers. The traditional corporatist
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323
pillar that tied labor to the PRI was badly shaken, as union leaders sold out their
constituents to the PRI but also lost the little influence they had over the decision
making process. Unions reacted defensively to the economic policies during the
sexenio, limiting themselves to securing wages, even if low, since employment was
almost a privilege given the increasing downsizing and bankruptcies in the private
sector. The most vociferous opposition came from the right, and its criticism
demonstrated the emerging cracks in the system. All these combined to the support of
the PAN by many smaller businessmen and the support of the Cardenas-led left by
workers, both in response to the technocratic approach that seemed to favor only the
big capitalists and the wealthy elite of the country.
As argued above, the problems that the de la Madrid administration confronted
were not caused by adverse external conditions, as Lopez Portillo and his team tried to
argue. Rather, they originated with the internal disequilibria caused by policymaking
mistakes, first by the Echeverria and Lopez Portillo administrations and then
aggravated by the de la Madrid approach. Certainly the 1982 shocks interacted
negatively with Mexico’s own dire internal problems, and even exacerbated them, but
they were not the sole cause of the ‘lost decade’.
These economic problems were increasingly reflected in the electoral arena.
With the PRI losing greater percentages of the vote at all levels of government over
the course of the 1980’s. As Wise explains, up until the 1980’s the PRI had refined
political spending to an art, manipulating fiscal and monetary policy around election
time and maintaining the party’s broad constituency through a thick web of patronage.
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But the severity of the 1982 crisis, constricted fiscal policy like never before. The
most immediate impact of the economic crisis was to deepen rifts that had already
appeared between traditional societal actors, and to create new cracks as the full
weight of the adjustment burden quickly affected them. The stubbornness that de la
Madrid showed in prioritizing foreign debt payments proved to be costly to the PRI’s
hegemony.9 7
Pro-cyclical fiscal policy continued to be the rule for the Mexican government.
With the country immersed in one of its worst economic crises ever, the government
approached it with fiscal policy restraint. Cuts in the most important categories of
government spending were common throughout the sexenio, rendering the situation
even more difficult. The adverse economic cycle was accentuated by the government’s
actions and the population continued to suffer the ills of procyclical fiscal policy. In
this sexenio, the slice of the fiscal pie was reduced and most of the pressure groups
lost economically. The winners were the beneficiaries of the neo-liberal policies and
those who had the means to buffer their income from the deleterious effects of
procyclical fiscal policy.
9 7 Wise (2003), 210.
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Table VIII.6 Summary of Economic Indicators and Government Expenditure, 1983-1988
Cateqory 1983 1984 1985 1986 1987 1988 Com ment 1983-1988
Real GDP 4,629.00 4,796.00 4,920.00 4,736.00 4,822.00 5,206.00
1982-1988 increase of 7.76%
combined
GDP Growth % -4.2 3.6 2.6 -3.8 1.8 1.3 0.21% avg increase
Inflation % 80.8 59.2 63.7 105.7 159.2 51.7 86.72% annual average of the sexenio
E xchange Rate
pesos/dollar 0.16135 0.20997 0.44750 0.89620 2.29440 2.28400 1315.55 peso devalution
Interest Rate (Mex Cetes
91 days) 59.10 49.30 63.20 88.10 103.10 63.80
71.1 avg interest rate m ex cetes 91
days
Fed. Gov. Net Total
Expenditures % of GDP 25.92 24.11 24.42 29.06 31.27 25.43
P eaked in 1987 at 31.27%, dropped
18.7% in 1988
Fed Gov Primary
Expenditures % of GDP 17.01 16.78 15.52 14.96 13.44 10.79
1982-1988 increase of -36.57%,
dropped every year
Fed Gov Interest
Expenditures % of GDP 8.91 7.33 8.90 14.10 17.83 14.63
Peaked in 1987 at 17.83%, 1983-1987
increase 100.11%
Fed Gov GCU % of GDP 22.12 20.89 20.64 25.92 28.06 23.62
P eaked in 1987 at 28.06%, dropped
15.82 in 1988
G overnm ent Investment
% of GDP 0.96 0.89 0.95 1.09 0.96 0.54
Total increase of -43.75%, 1986-1988
increase of 50.46%
Capital Expenditures % of
GDP 3.81 3.22 3.78 3.14 3.21 1.81
1983-1988 increase of -52.49%, avg
3.16%
Transfers % of GDP 2.28 1.83 2.27 1.92 2.17 1.19 Total increase of -47.80%
Governm ent Social
Expenditures % of GDP 7.60 8.00 8.30 8.20 7.90 7.60 7.93% avg
G overnm ent Education
Expenditures % of GDP 2.75 2.86 2.88 2.65 2.65 2.61 2.73% avg
Governm ent Health
Expenditures % of GDP 3.03 2.81 2.82 3.03 2.73 2.78 2.86% avg
G overnm ent Social
Expenditures 308.40 322.10 343.10 317.00 299.70 294.60 314.15 avg
Governm ent Education
Expenditures 127.50 137.20 141.50 125.70 127.70 127.70 131.22 avg
325
Table VIII.6 Continued
Cateqory 1983 1984 1985 1986 1987 1988 Com m ent 1983-1988
Government Health
Expenditures 140.30 134.70 138.70 143.60 131.80 136.00 137.52 avg
Public Sector Acquisitions 169.69 186.51 200.62 168.79 132.29 171.00
171.48% avg, 1983-1985
increase 18.23%, 1985-1987
increase -34.06%
Budgetable Current
Expenditures 1,286.95 1,295.16 1,371.49 1,284.80 1,169.04 1,409.76 Total increase 9.54%
Capital Expenditures 223.52 207.27 178.72 155.29 143.38 143.02 Total increase -36.01%
Fed. Gov. Interest
Expenditures 353.33 348.44 349.65 450.14 535.89 624.45 Total increase 76.73%
Interest Expenditures
Total 489.43 496.49 460.50 539.66 596.72 686.14 Total increase 40.19%
W aqe Expenditures 221.57 225.40 225.93 178.95 172.43 205.20 1983-1987 increase -22.17%
Budgetable Public
Expenditures 1,510.47 1,502.43 1,550.22 1,440.08 1,312.43 1,552.78 1478.06 avg
Fed. Gov. Capital
Expenditures 85.25 74.47 65.22 67.13 61.46 41.79 Total increase -50.98%
Fed. Gov. W age
Expenditures 108.04 114.85 109.18 84.53 90.64 102.94
101.68 avg, from 1985 to 1986
dropped 22.58%
Current Transfers 205.93 172.26 173.86 129.38 91.63 107.92 Total increase -47.60%
Net Total Transfers 102.43 70.74 88.87 78.67 59.85 78.00 Total increase -23.85%
Public Sector Financial
Deficit % of GDP (8.61) (8.50) (9.57) (16.02) (16.04) (11.71)
1983-1987 increase 86.29%,
1987-1988 increase -27%
Public Sector Primary
Deficit % of GDP 4.04 4.18 3.93 2.48 5.71 7.57
Public Sector Operational
Deficit % of GDP 0.40 (0.30) (0.80) (2.41) 1.80 (3.37)
Public Debt Total 62,556.20 69,377.90 72,080.10 75,350.90 81,406.80 81,003.20 Total increase 29.48%
Public Debt Long-Term 52,778.70 68,994.40 71,626.00 73,956.80 80,845.90 80,223.30
Public Debt Short-Term 9,777.50 383.50 454.10 1,394.10 560.90 779.90
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IX. Conclusions
The purpose of this dissertation has been to test the nature of Mexican fiscal
policy and my main finding is that it has been procyclical. I explain this procyclical
behavior as resulting from the pressures that interest groups have successfully exerted
on the government and in doing so I borrow from the work of Talvi and Vegh, Stein et
al., and Lane. Such pressures make it difficult for governments to pursue a different
kind of fiscal policy in developing countries, and especially in Latin America, where
fiscal systems are weak to begin with. I chose to analyze the period from 1970 to 1988
because these three sexenios represent decisive policy junctures for the Mexican
economy and the root of many of today’s macroeconomic problems.
In this dissertation I have analyzed the behavior of domestic interest groups
vis-a-vis the Mexican government from the standpoint of political economy. I argue
that the relationship between the government and interest groups has varied across the
three sexenios according to the nature of the actors involved on both sides. Ideology
plays an important role in this relationship, as in many cases this is what prompts the
main protagonists to pursue different goals and policies.
It is on the basis of this historical analysis that I have identified Mexican fiscal
policy as procyclical. This is, during most of the years under study there is a positive
correlation between the fiscal deficit and the growth of GDP. I used some econometric
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328
tools to analyze the data that helped me arrive at this conclusion.1 As I hypothesized,
many government spending categories proved to be positively correlated with the
business cycle, thus confirming that Mexican fiscal policy has been procyclical.
I also found that government revenues follow a procyclical pattern, confirming
my expectation that in good times, as government collects more revenues, pressures
from interest groups increase and the government concedes by spending more.
Otherwise, the optimal behavior would be to repay the debt that had been contracted
during earlier periods of crisis. This would permit the government to incur more debt
and to increase spending in times of crisis, therefore shifting fiscal policy onto a
countercyclical track. If the behavior of fiscal policy did not vary during the business
cycle, it would be acyclical, and more in line with neo-classical advice. Under both
scenarios the government would be using fiscal policy to smooth the business cycle,
which should be one of its fundamental functions.
One interesting finding in this study is that when fiscal policy behaved
countercyclical^, it exhibited the same pattern during most of those years. When the
growth of GDP decreased, the government increased its fiscal deficit because policy
makers perceived the slow down of the economy and the negative shocks to be
temporary. This conforms with the findings of Arreaza et al. that governments tend to
provide more smoothing of negative than of positive shocks. But as time went by and
the economy did not recuperate as quickly as envisioned, the government reduced its
1 1 ran regressions with time series data to find the existence of positive correlations between GDP and
different government spending categories. The data used was converted into constant prices and filtered
using the HP-filter to obtain the cyclical coefficients o f every time series.
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329
spending and imposed restrictive fiscal policies, along procyclical lines. This counter
productive behavior has characterized the Mexican government’s policy approach
over the years, imposing fiscal restraints at the very point when the economy has
already hit difficult times. The years when fiscal policy was countercylical are those
when interest payments increased abruptly and the government devoted a big
percentage of its resources to avoid defaults.
When fiscal policy variables from Mexico were compared with the results
presented by Lane for an OECD sample of countries, Mexico’s fiscal policy turned out
to be more procyclical than that of the OECD sample. Ireland and Portugal were the
only OECD countries that followed a more procyclical fiscal policy than Mexico,
although some categories registered similar coefficients. The common feature among
these countries is that all face credit shortages during times of crisis. An important
conclusion of this dissertation is that, even though the maintenance of a procyclical
fiscal policy is not an optimal strategy for the government, it is difficult for policy
makers to avoid the kinds of interest group pressures that make it procyclical.
Acyclicality and countercyclicality are more sound strategies, as both use fiscal policy
to smooth the economic cycle or at least not to exacerbate it. The wellbeing of many
economic agents would be better promoted in this way, but it is not an easy task to
achieve.
After running some econometric models, I found strong evidence that pressure
groups do influence fiscal policy in Mexico. In line with the findings of Talvi and
Vegh, interest groups adjust their pressures according to the economic cycle, therefore
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330
pushing the government to overspend in times of prosperity. During a recession, the
government is able to establish strict fiscal limits and pressures ease in these periods.
After testing for the existence of a political business cycle, I did not find any
evidence that this phenomenon exists in Mexico. Spending consistently followed the
economic cycle and since this cycle does not necessarily coincide with the electoral
cycle, the possibility of a political business cycle decreases considerably. The lack of a
political business cycle should not be surprising, since until 2000 Mexico had a very
particular political system. The prohibitions against presidential reelection in Mexico
greatly diminished the incentives that incumbents might have to increase government
• 2
spending in pre-election periods. Taking into account the rotating bandit argument, it
emerged as perfectly rational for the government and pressure groups to behave in this
way. Presidents prefer to garner support during the earlier part of their term in office,
and as their time horizon shortens under term limits, spending to appease political
supporters becomes less urgent. To appease the different pressure groups and secure
stability for their sexenios, presidents spend the money up front when it is available,
with little concern about saving for a rainy day.
Take for example, the Echeverria sexenio. In 1970 Echeverria left behind the
once successful strategy of ‘Stabilizing Development’, which had produced high
growth and stability for two sexenios, but little in the way of social advancement.
Echeverria’s new economic strategy, ‘Shared Development’, marked the start of a new
period of Mexican political economy. This was an effort to promote economic
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331
development, social modernization, and distributional justice for the most needy
classes in the country. His administration started with a tight approach to fiscal and
monetary policy in accordance with the difficult economic situation that undolded in
the early 1970’s. As the growth rate slowed, the public deficit also decreased during
the first year of the Echeverria administration, a trend typical of a procyclical fiscal
policy adjustment. The procyclicality of fiscal policy under ‘shared development’
continued through 1972, as the economy recuperated and populist spending provoked
a steep increase in the public deficit.
The years 1973 and 1974 saw a change in fiscal policy along more
countercyclical lines. Although GDP growth had slowed, populism continued to spur
public spending and the fiscal deficit increased. The National Patrimony Minister
backed by different interest groups rallied to pressure the government to increase
public spending. During the last two years of this administration, procyclical fiscal
policy returned. In 1975 the fiscal deficit increased while growth accelerated.
Echeverria’s last year, 1976, the fiscal deficit was reduced and the growth rate
declined. For the most part, this administration followed a procyclical fiscal policy, as
it cut spending when the economy slowed and increased it growth accelerated. There
is no evidence that during this sexenio the government tried to smooth the economic
cycle, as economic theory advocates. Instead, fiscal policy was reacting to numerous
societal pressures at play.
2 Autocrats, whenever they have short time horizons, become, in effect roving bandits, since there are
few incentives for the autocrats to look beyond his own time horizon when making policy decisions.
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332
Lopez Portillo came to power in 1976 with the country immersed in a severe
economic crisis, marked by a currency devaluation, private sector restlessness, other
groups clamoring to influence policymaking, and the economy operating under tight
fiscal and monetary targets in accordance with an IMF program.
Under the Lopez Portillo administration, fiscal policy behaved procyclically
from 1977 to 1979. The first year started with a recovery program to deal with the
1976 crisis. In this year the government implemented strict fiscal policies, reducing
government expenditures and its fiscal deficit, as the economy reduced its growth rate
plummeted. As Mexico’s oil production took off, the PEMEX coalition pressured for
investment in this industry and the administration abandoned its tight fiscal policies. In
1978 and 1979 the fiscal deficit increased, as the state upped its role in the economy
and with it, public expenditures. The economy posted high growth rates under the
thrust of an oil price boom, and almost every spending category saw big increases up
until 1982. Clearly, pressure groups were profiting from the government’s spending
spree and this, of course, encouraged more spending. During 1980, the GDP growth
rate began to slow while the fiscal deficit increased at a moderate pace: in this year
fiscal policy was acyclical for the first time in the period under study. In 1981 the
economy grew at a very fast pace but the fiscal deficit outpaced it, the cause being the
explosion in interest payments in the external debt. The government was thus forced to
overspend and fiscal policy behaved in a countercyclical way. The government’s
earlier spending spree had caused the debt to increase at an extraordinary pace and
fiscal revenues were nowhere near enough to cover it. Interest groups encouraged this
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333
spending boom, as they were able to capture the gains. The oil boom ended in 1982
when oil prices began to fall and international interest rates skyrocketed leaving
Mexico little choice but to reduce public spending. Fiscal policy that year was again
countercyclical, as the GDP growth rate turned negative and the fiscal deficit exploded
under the pressure of compounding interest payments.
Whereas fiscal policy was procyclical during Lopez Portillo’s first three years,
it turned acyclical during his fourth year and then countercylical during the last two
years of this sexenio. This change in fiscal policy behavior, from procyclicality to
countercyclicality was certainly not premeditated. Rather, it was a reaction to the
tough economic circumstances that had set in and did not serve the purpose of
smoothing the economic cycle, as economic theory suggests. This shift in the nature of
fiscal policy also reflected the government’s inability to grasp that the ‘abundance’ of
easy borrowing and oil revenue boom had come to such an abrupt end.
The de la Madrid administration, elected in 1982, was left to pursue the
necessary changes in fiscal policy, including a new round of administrative reform,
decentralization, and the divestiture of state assets. The government reduced public
expenditures in almost every category with the exception of interest payments on the
external debt. Public investment suffered the steepest cuts, and this constrained the
prospects for a sustainable economic recovery. The de la Madrid administration used a
top-down approach to economic policy and most interest groups, with the exception of
the largest capital groups, which turned their efforts toward the export sector, were
now marginalized from the decision making process. For the first time in decades,
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334
interest groups could not effectively pressure the government even though they were
losing serious economic ground. Given the severity of the 1982 debt shocks, it could
be that interest coalitions succumbed to the crisis. This surprisingly low-keyed stance
of Mexican interest groups supports Talvi and Vegh’s insights concerning the
procyclicality of fiscal policy, as the costs of lobbying the government came to exceed
the expected gains.
This said, procyclical fiscal policy continued to be the rule for the Mexican
government. With the country in the middle of a crisis, that surpassed the Great
Depression, the government supported fiscal policy restraint and sought to reduce the
fiscal deficit. Cuts in almost every category of government spending were
implemented while the economic cycle further declined. The growth of GDP declined
for the second consecutive year in 1983, while the deficit was almost halved in that
same year, therefore fiscal policy turned procyclical. GDP recovered somewhat in
1984, while the fiscal deficit did not vary, so fiscal policy was acyclical in that year. In
1985 the government relaxed the austerity measures and expanded fiscal policy while
the growth rate declined, rendering fiscal policy countercyclical. But
countercyclicality was not an explicit decision taken by the government. It was
occasioned by highly unfavorable external factors, such as an oil price crash in 1986
and soaring interest payments which together caused the fiscal deficit to almost
double. In this year growth turned negative, and fiscal policy was countercyclical for
the second straight year. In 1987, procyclicality returned as the fiscal deficit increased
moderately and the economy recovered. By 1988, the government reduced its fiscal
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335
deficit in the midst of renewed recession and another round of austerity meant to
stabilize the economy, thus continuing the tendency toward a procyclical fiscal policy.
In this sexenio, economic losses were the rule as most pressure groups suffered from
the prolonged effort to stabilize the economy. The winners were those outwart-
oriented groups that were in a position to profit from economic opening and the selling
of state-owned companies.
During the 18-year time span of this study, interest groups for the most part
exerted pressures on different administrations with an eye toward achieving their own
gains through increased public spending. The groups that profited changed with time,
as the administrations studied here adopted different policy stances toward their
various constituents. Big capital was arguably the most powerful pressure group over
time, although on some occasions the government openly defied it and faced the
consequences of capital flight and lags in private investment. Other groups such as
labor and peasant organizations were favored at different times, although in the end
they suffered the most from the post-1982 economic adjustments. It is worth
mentioning that the presence of powerful individuals within each administration who
challenged the fiscal conservatism and power of the Finance Minister also affected
fiscal policy, making it more procyclical. Also, there is a trend in Mexican fiscal
policy-making to implement strict stabilization measures during an economic crisis,
something that greatly encourages procyclicality.
There is evidence that fiscal policy in Mexico continued its procyclical trend
from 1989 to 2003. In the Salinas administration fiscal policy was procyclical in 3 out
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336
of six years and during the Zedillo administration it was procyclical in 5 out of 6
years. The current Fox administration has followed a procyclical fiscal policy during
its three years in power, as recession has hit the Mexican economy and the
government has tightened fiscal policy by implementing several budget cuts.
Procyclical fiscal policy in Mexico seems to be a phenomenon that will not be
eradicated any time soon, especially given the country’s low savings rate and the
political gridlock that has beset recent efforts at tax reform. The prospect of using
fiscal policy as tool to smooth the business cycle does not seem likely since pressure
groups have become more powerful and the government has become more polarized.
Now, with three major parties battling each other for power, interest groups play an
ever important role in shaping fiscal policy outcomes.
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337
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352
Appendix 1
Figures Showing the Procyclicality of Fiscal Policy
Figure 1.1 GDP vs Government Total Spending
GDP vs Gov Total Speding
a r
Years
-GDPRCY
-GTCY
Figure 1.2 GDP vs Government Current Spending
GDPR vs Current Spending
c
o
-200 £ &
GDPRCY
PSBCUCY
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353
Figure 1.3 GDP vs Government Interest Payments on Debt
GDP vs Debt Interest
c
o
°r
&
-400
-600
Years
-♦—GDPRCY
- m — DITOTCY
Figure 1.4 GDP vs Government Wage Consumption
GDP vs Wage Gov Consumption
GDPRCY
WGCCY
_ 600 I — -------- 1 -60
Years
R eproduced with perm ission of the copyright owner. Further reproduction prohibited without perm ission.
Figure 1.5 GDP vs Government Social Spending
GDPR vs Gov Social Spending
200
600
150
400
100
o 200
I
j -50
f\ -100
-150 -400
-•—GDPRCY
-■—GSOCCY
Figure 1.6 GDP vs Government Education Spending
GDP vs Education Spending
-200
-•—GDPRCY
GEDCY
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355
Figure 1.7 GDP vs Government Financial Deficit
GDP vs Financial Deficit
-♦—GDPRCY
FINDEFCY
Figure 1.8 GDP vs Oil Prices
GDPR vs Oil Prices
600 | - - - -i 40
J
400
< »
■ o 200
(0
I 0
1 -2$M
-400
-600 ' - ....................- ......- ---- -------------------- J 0
Years
Note: all series represent the cyclical component of each variable, except oil prices.
♦-G D P R C Y
• - O IL
600 ,
400 I
200
c
0
1 o
• 100
V -100
-400
-600
Years
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356
\n p e n ^
/nts o f the 1972 T ax R eform Proposal
accumulation o f earnings for income tax.
disappearance o f bearer shares and bearer bonds (all wealth position;
disclosed to the tax authority).
c) A wealth tax, more for supervisory practices that on account o f its
possibilities, because the wealth tax was to carry only a token rate.
d) Closing o f loopholes.
e) Redefining the tax base by enlarging it.
f) Increasing the marginal personal income tax rate to 42%, beyond one
pesos, to equal corporate income tax. The highest personal incom e tax at t
was 35%.
Source: Solis, 1981.
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357
Appendix 3
Pact for Economic Solidarity (PSE)
Phase 1 (December 1987-February 1988)
Tax measures: -elimination of subsidies to agriculture. Elimination o f the accelerated
depreciation incentive and a additional import tax (5%).
Public price and fee adjustments.
Reduction in programmable spending by 1.5% of GDP.
Exchange rate policy to support deflation without sacrificing competitiveness.
Trade policy: reduction o f the maximum import tariff from 40% to 20%, and elimination
of permits.
Immediate minimum wage rise o f 15%; 20% rise in January. Monthly review according to
anticipated inflation (ex-ante).
Guaranteed prices for agricultural products to be kept at their real levels o f 1987.
Price agreements for basic products.
Phase 2 (March 1988)
Constant public sector goods prices and tariffs.
Exchange rate fixed at the level of 2/29/1988.
No price tariff or controlled prices rise.
3% rise in the minimum and contractual wages.
Corresponding adjustment to guaranteed prices.
Through consensus gathering, pact to freeze leader prices.
Pact for Stability and Economic Growth (PECE)
Phase 1 (January 1989-July 1989)
F iscal budget co n sisten t w ith lo w er inflation and gradual e co n o m ic recovery.
Public sector prices with greater incidence over CPI will remain constant. Some prices to
commerce and industry rise, but entrepreneurs agree on absorbing the impact.
The exchange rate o f the peso against the dollar was to crawl 1 peso a day.
Reduction o f the import tariff spread.
It is agreed that controlled prices will be revised on a case-by-case basis.
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358
Support prices for agricultural products will be revised to maintain their real levels. Price
o f fertilizers remains constant.
Phase 2 (August 1989-March 1990)
Public sector prices to remain constant.
The crawling peg remains at 1 peso a day.
Firms agree to maintain their price levels and to guarantee supply.
Controlled prices are reviewed on a case-by-case basis.
The government stresses its commitment to speeding up the regulation process.
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Creator Sanchez de Cima, Manuel (author)

Core Title The political economy of procyclical fiscal policy in Mexico, 1970--1988

Degree Doctor of Philosophy

Degree Program Political Economy and Public Policy

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

Tag economics, general,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c16-532199

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