The Sociodemographic Effects of the Crisis in Mexico

Chapter One: Introduction The Economic and Political Crisis in Mexico Henry A. Selby

In September 1982, José López Portillo, then president of Mexico, accomplished an astonishing feat. In the last four months of his administration, a supposed lame duck with his successor already elected, and with the knowledge of less than six people in his own government, he nationalized the banks. At the same time he clapped on currency controls, proclaimed himself the scourge of the "sacadolares" (people who had taken their money out of Mexico), and anointed himself Lázaro Cárdenas redivivus. The economic crisis of the eighties began, but now in the open. At first ordinary people did not care very much. They didn't have bank accounts and so the sight of armed guards around the banks, so emplaced to prevent revolution it was said, did not impress them one way or another. All the bally-hoo about the raising of Lázaro was manufactured as they well knew. When the media's enthusiasm for the immediate political crisis waned, life, in the aftermath, seemed to go on about as it did before. But everything had changed, as was to become clear in the subsequent years. López Portillo was the last of the old-style caudillos to inhabit the Mexican presidency. He began his Presidency in hauteur, and ended it in farce, leaving it for his protégé and successor, Miguel de la Madrid, to institute the policies of austerity that the international financial agencies required and suffer the political consequences, as he did to Carlos Salinas de Gortari, and Salinas did to Ernesto Zedillo Ponce de León who assumed the presidency in 1994.

December 1st 1982 saw the inauguration of the new president, Miguel de la Madrid. By now there were warning signs that ordinary people knew that something was wrong. One of us attended the Inauguration and saw that the crowds were sparse, and that the incoming president publicly bitter about the criminal corruption of his predecessor, although unlike a later president, he did not specify the charges nor name the culprit. Three months after the nationalization of the banks, people had become upset; jobs were disappearing, shops were closing, people were restive. For once the fabled Mexican sense of humor was muted; there were no crisis jokes: even the politicians weren't funny any more.

The next years were very difficult indeed for ordinary people in Mexico, as indexed by the fact that their wages were reduced by an average 50 percent in six years, according to the report of the President. Median incomes suffered less severe losses, as one would expect: median incomes of heads of household dropped 37 percent in the period 1978-1989, while median household incomes dropped 14 percent in the same period, despite the efforts of the householders to put as many of their members to work as they could[1]. As the crisis wore on, with inevitable periodic eruptions of euphoria in the newspapers, ordinary people began to believe that the crisis was permanent. In January 1988 the Economist reported that Mexico's financial deficit had reached 18.5 percent of GDP, surpassing 1982's record 17.2 percent, inflation had reached 150 percent and GNP growth had only managed 1 percent , even though Mexican labor had suffered a pay cut in five years of the last six. On July 6th 1988 any pretense that Mexico was the same as it had been before the crisis was stripped away when the government had to resort to crude manipulations of the election to assure their continuance in power.

Curiously there were some good aspects to the crisis. Mexicans believed themselves more united than ever before, because everyone was affected by the economic crisis. The middle class, which had grown and prospered in the latter years of the great expansion, and had gotten accustomed to taking trips abroad, and access to the other perks that attend prosperity and an over-valued currency, had gotten their come-uppance, and ordinary people were glad for that. In years past it had galled a lot of ordinary people to see the airs of the new middle class with their television life styles. Ordinary Mexicans felt that they were being cut off from their own countrymen. But now this was changing. Mexicans were all in this together, except for the upper classes, the rich and powerful, and the business people with American or European friends and bank accounts, who though daily duped on television soap operas were known to lead a life apart. Now the term "ordinary" or "popular classes" had come to embrace the great majority of Mexicans, perhaps 75 or even 80 percent of them, and the crisis lent an air of common sacrifice and a bond of unity which the government hastened to exploit.

What could poor Mexicans, below the middle class, do to endure the economic crisis? They had no financial reserves to call on. They couldn't cancel their charge cards, sell the condo in Padre Island, and forego foreign travel since they had never had any of these. The obvious strategy would be to do what they had always done, hunker down, call on their families to stick together and wait out the crisis which is precisely what they did.

As everyone can now see the economic crisis did not begin in September 1982. It's beginnings were clearly seen in the previous administration's sexennium (1970-76), and only the discovery of huge deposits of oil and the rise in oil prices had staved off the reckoning which would have been easier had it come earlier. By the end of the 60s the import-substitution development strategy had run its course. Looney (1987:92) summarized the growing problems of the Mexican economy in his study of productivity growth in the years 1945-80, and attributes productivity losses during that period to "1) a growing inappropriateness of the input mix of production, 2) a growing inappropriateness of the composition of output because of government intervention, 3) declining competition, and 4) a rapid increase in the number of workers entering the labor force resulting in a marked slowdown in productivity in the sixties with ominous implications for the economy." And Looney cites Clark Reynolds' (1980) study which found "productivity gains at the national level rising steadily from the 1940s through the 1950s only to level off in the mid-1950s, finally reaching a high of 3.4 percent per annum in the period 1960-65, falling to 2.9 percent per annum in the second half of the decade, and further declining to 1.6 percent per annum in the 1970-75 period."

The import-substitution process has a logic and life course of its own. It starts off with manufacturing goods which are the simplest, and require little or no added infrastructure, and few forward and backward linkages. But as the process moves along it gets harder and harder, because it becomes more complex and involved. At first an entrepreneur could import a piece of machinery, and the inputs, and manufacture a product for sale behind high tariff walls and be guaranteed a profit with minimal competence or competition. But as time went on, more complex and difficult manufacturing processes were required, which themselves needed more sophisticated communications, processed inputs, and marketing strategies. Pursuing the import substitution strategy for the development of a competitive and sophisticated manufacturing sector gets harder and harder. By the end of the 60s the easy imported products already had their locally manufactured substitutes. The hard, expensive substitutes remained, and these would require higher levels of investment, and structural changes in the economy.

The import substitution process breeds inefficiencies in abundance. Locally made products are shielded from outside competition and so can be shoddy and still be sold locally even though their low quality preempts successful entry into the world market. The policy breeds corruption and large bureaucracies as well. Imports are not only controlled by tariffs, but also by licenses and other administrative devices, which provide ample grounds for corruption and bureaucratic control which add to the inefficiency of the process. (The proportion of imports subject to licensing was 28 percent in 1956, 60 percent in the 60s and 70 percent in the 70s, and sometimes as high as 100 percent during periodic crises in the balance of payments.) Import-substitution breeds sloppy, fat enterprises selling into captive markets with guaranteed profits. There is a built-in disincentive against exporting goods except for fungible commodities, like oil, minerals and marine products. At the same time it helps build costly bureaucracies and public sector budgets.

Import substitution policies were part of a larger set of economic relations of dependency that posed additional problems, which were not being attended in the late 60s and 70s. Mexico was not about to, and could not afford to, engage in the kind of research and development that would allow it to produce machine tools and geography, demography, and economy. It was too difficult, too chancy and too expensive, particularly when everything could be purchased abroad with little difficulty. This was fine so long as balance of payments difficulties did not intercede, so long as foreign investment and foreign loans made up the differences in the current account. But dependent development has its inefficiencies as well. Payments must be made in royalty form for patents and licenses to foreign firms, profits are repatriated, and the costs of small scale production for an élite local market must be paid. The call on the surplus is twice what it is in the developed or autocentric economies by some reckonings (de Janvry, 1981), posing great problems for the economy. By 1976 more money was leaving the country than was being brought in; Mexico was being decapitalized.

A third set of reasons for the crisis derived from the Echeverría administration's (1976-1982) costly attempt to calm the middle sectors whose children had revolted in the political demonstrations of 1968 (Tlaltelolco), and 1971 (Jueves de Corpus). They had protested against the fact that much of the country been excluded from political activity, the economic rewards of the import substitution strategy had been very uneven. As Cornelius, Gentleman and Smith (1989: 6-7) point out, it helped to produce a highly uneven distribution of income. Between 1958 and 1977 the share of income going to the poorest 20 percent of Mexican households dropped from 5.8 percent to only 2.9 percent. The income share for the topmost decile also decreased, from nearly 50 percent to just over 40 percent. The biggest relative gain was made by the country's middle class, especially by the upper echelons within that category, a gain which would be wiped out in the aftermath of the crisis, as Cortés and Rubalcava, Tuirán and González de la Rocha point out in their chapters in this book. The legitimacy of the system had been brought into question, not just the party but the whole state apparatus, the press and the economic policy of "stabilized development". The closed political system had to be opened and excluded people had to be accommodated, and they were brought into the party or given some other form of public sector job or handout, once again putting immense and unwelcome pressure on the national budget. (It was said that all but one of the graduating class in the Faculty of Politics at the National University in the early 60s, the most radical group in the uprisings of '68, had been so accommodated by the early 70s (Hellman, 1983:140). Except, of course for those who had been killed outright, were still in jail, or who had been disappeared. This act of co-optation was very costly, and could not be paid out of the oil revenues because there were no oil revenues, and would not be for a few years. From every direction pressures were being put on the public purse, and always there were ample foreign funds to satisfy the demand. Mexico was a good credit risk: fifty years of stable government, and forty years of steady 6 percent annual growth are very appealing to bankers looking for profitable opportunities for recycling Middle Eastern petrodollars.

There were then three sets of causes for the economic crisis: the obsolescence of the import-substitution model (which could be seen in declining productivity), the turn around in the direction of foreign funds from net inflow to net outflow, and the costs of legitimizing a regime that had outlived its day. By the middle 70s a disaster was waiting to happen. In fact, it almost did in Echeverría's last year (1976) when the combination of populist adventurism on the part of the president, combined with a hefty and clumsily handled devaluation induced people to put their money into sounder hands abroad.

The boom from 1978 to 1981 in the run-up to the crisis was truly impressive so far as economic statistics were concerned. Annual GDP growth averaged over 8 percent. But at the same time inflation was high, and the country's external debt was soaring, all tied to the rising price of oil, which had increased from $13.30 in 1978 to $33.20 in 1982.

There had been great debates within the government and the bureaucracy about the disposition and pricing of Mexican oil, but, in the end Lopez Portillo, and his designated Director of the state oil company (PEMEX), Jorge Díaz Serrano, had won out, and oil, instead of being developed slowly, and quietly, strictly for the benefit of Mexicans, was announced in its full abundance (the reserves were staggering), and rapid development was decreed[2]. The result was inevitable: by 1981 oil sales represented 72.5 percent of exports, and the economy was petrolized, just as the critics had feared.

In retrospect the slight drop in the price of oil in early 1982 which triggered the capital flight which triggered the bank nationalization seems trivial. The spot price dropped about four dollars, and Díaz Serrano asked permission to reduce Mexico's prices accordingly. The Presidential nod was given, but, strong protests were heard from the economic cabinet, and since the oil minister had become too big for his boots in the presidential race among the precandidates, he was "burned", driven out of the race, and eventually jailed by the incoming president, Miguel de la Madrid. In August, the Mexican finance minister had to confess to US officials and the international financial community that Mexico was out of foreign exchange. It was, essentially, broke.

Responses to the Crisis.

The response to the crisis in Mexico can be discussed in three phases. From 1982 to 1985 the De la Madrid administration tried an orthodox set of adjustment measures that would leave the system pretty much in place. That strategy ended in 1986, when the decision was taken to join the GATT and thus open the Mexican economy to foreign competition. This strategy was carried through to around 1989, when Mexico decided to try to be the prime mover in the creation of a North American Free Trading Area (NAFTA).

The orthodox response (1982-1985)

The De la Madrid years started on the theme of "renovación moral", the slogan that had so piqued his predecessor since its reference was both pointed and clear. But De la Madrid was a neoliberal, and renovación was soon to spread to public finances which he regarded as bloated and badly administered. He had not even been informed of the nationalization of the banks, had disapproved of the move on both ideological and practical grounds, but recognized the impossibility of undoing it because of the offense it would give to the left (who supported it) and because of the picture of instability in Mexican policy it would project to the financial world. As soon as he could he set up a parallel banking system which led to his successor's reprivatization of the bank. His reforms, in retrospect, were timid indeed; he wanted to rescue the system through orthodox changes, reducing the public sector borrowing requirement (PSBR), reducing the size and salaries of the "bloated public sector", controlling the money supply, and devaluing the currency in order to right the balance of payments which had tipped perilously against Mexico. He wanted to produce a good business climate, as well as "business as usual" without confronting the fact that it was the system itself which more and more guaranteed the crisis. As Lustig (1992) suggests, what needs to be explained about the Mexican crisis, or depression, is not why it occurred, for that is fairly obvious, but why it went on so long. And, she concludes, one of the major reasons was the failure of the first attempts to bring it under control through the use of orthodox methods.

The statistics of the first depression years, 1982-85 were dramatic. The oil price was fairly stable around $26. per barrel, but economic growth was erratic, with every good year being followed by a bad one, with a catastrophic decline in 1986. In 1983 Mexican GDP dipped 5.3 percent, and although it recovered partly in 1984, and 1985, the four years saw net zero growth. The decline in wages was at least 30 percent, and 46 percent in construction(Lustig, 1989:425), the most important employment sector for many of the poorest Mexican workers, if only 19.6 percent in financial services. The decline in the general level of wages was 5.1 percent in 1982, 22.9 percent in 1983, 5 percent in 1984 and 0.2 percent in 1985. Concurrent with the decline in wages in general, the share of GDP going to wages declined from 35.9 percent in 1982 to 28.9 percent in 1985, while, during the same time period, the share going to capital grew to a record 54 percent, Martinez (1989: 378). Prices increased: while the price of foods consumed by the poor majority of Mexicans (tortillas, beans, beef, milk, eggs sugar coffee and fats) increased to be even higher than they had been in 1934, in terms of minimum salary units. The salary issue became acute, because the administration was very concerned about the costs of public subsidies which they felt were creating a "fictional economy" for the majority of Mexicans, and shielding them from the consequences of their own situation. Consequently, the subsidies on basic foods and goods ("productos básicos) were reduced. From 1982 to June of 1986 the minimum salary, which was more and more becoming the base salary for Mexican workers, rose 363 percent, while the price of tortillas rose 426 percent, bread more than 1,800 percent and eggs 582 percent from their previous subsidized levels. (Martinez, 1989:418). As Báez and Tiburcio González put it (1989:453), "whereas in 1982 it had required 50 hours of work to enable the average worker to buy the 22 foods of the 'basic market basket', by 1986 the number had grown to 85 hours, or two weeks to buy food".

Urban unemployment (desempleados "permanentes", who have spent more than nine weeks unemployed) was 23.8 percent in the second trimester of 1983, but the rate rose to 34.4 percent for the first two trimesters of 1985, according to the INEGI, or National Statistical Institute.[3]

There was one relative bright spot: the agricultural sector, where prices did not fall, but indeed rose as a result of the undervaluation of the peso which made imports, which increased at very high levels during the boom years, more expensive. Of course, most of the small farmers, the vast majority, did not benefit much, since their livelihoods are tied to their wage labor and rural wages were reduced, nor do they grow export crops, continuing to prefer, during the period, to grow maize, beans and squash in milpa agriculture. But in relative terms things did look better for those campesinos who owned enough land to exceed bare subsistence, and for the first time since the Revolution, one heard comments in the villages from the campesinos who lamented, perhaps with justifiable crocodile tears, the miserable condition of the some urban white collar workers, and even the village school teachers who in years past had been almost wealthy compared to them, and now were poorer[4].

In 1985 a terrible earthquake hit Mexico. As analyzed by vulcanologists it was of a type that would maximize the damage to the kinds of buildings that abound in Central Mexico City, and it created havoc there. Whole city blocks disappeared, the apartment towers of Tlaltelolco were either damaged or destroyed, but the worst damage was done in "Porifirian" Mexico City where sprawling three and four story buildings not only housed thousands of families in cheap apartments, but also assembly and textile factories that employed thousands of workers. Fortunately the earthquake struck before the morning shift went in, but still thousands of people (perhaps as many as 20,000) were killed. The government response was weak and ineffectual. The President appeared, too well turned out in an expensive leather jacket, to tour the affected areas. U.S. and world help was refused because of what outsiders considered misplaced pride, with a resulting shortage of the very kind of heavy earthmoving equipment that alone could disinter the victims, And when it did arrive, the zones were cordoned off by the army, which allowed, or so it was said, the machinery to be used to save heavy equipment and business records rather than the people or their remains. The earthquake was important because it laid bare the lack of imagination and energy in government circles, and its tendency to defend itself first in any time of crisis, rather than concern itself with the living conditions of Mexicans.

Opening the Economy and Abandoning ISI.

When it became clear that economic conditions were deteriorating again, and that no growth at all could be expected in 1986, the attempt to reform ISI was given up, and a new strategy was implemented. Following his instincts and those of most of the economic cabinet, De la Madrid joined GATT, thereby beginning the painful opening of the economy to outside competition (partially in the hopes of containing inflation) thereby killing the last remains of the ISI (import substitution) strategy, and embarking on an externally oriented economic growth program.

Still hard luck dogged the de la Madrid administration. In March 1987 the Mexican stock market crashed. Since much of the investment that had been coming to Mexico was portfolio investment and therefore affected by changes in the market, and since the memory of a 46 percent devaluation of the previous year was still fresh, the crash, which was even greater in percentage terms than the New York Stock exchange's crash of the same year, further discouraging investors from sending their money to Mexico[5].

But the heart of the second attempt to overcome the crisis was the bringing together the major elements of the Mexican economy into one important agreement, a concertación social which eventuated in the agreement to the Pacto de Solidaridad Económica known universally as the "Pacto". Under this arrangement, government agreed to set its house in order and get inflation under control, while increasing the primary fiscal surplus. With the reluctant agreement of labor, an incomes policy was instituted in order to break inflationary expectations. Privatization was agreed upon in order to stay the hand of the bureaucracy in the economy, which had been heavy indeed, and to dangle the prospect of profits through the sale of patrimony to the acquiring classes whose support for the reforms was essential, and whose cooperation in the repatriation of Mexican capital was essential, as well.

To the surprise of many, the Pacto seemed to work. As Lustig (1992:51) comments:

The Pact produced immediately good results. During the second semester of 1988 average inflation was 1.2 percent per month, far lower than the 9 percent registered during the same period in 1987. In 1988 real GDP grew at 1.3 percent, nonoil exports at 15.2 percent and private investment at 10.9 percent. The Pact clearly fared better than the more orthodox stabilization program of 1983, although they also started out at a lower level than in 1983. ... The "cost" of the policy package [in terms of reduction in foreign reserves] was about US $10 billion. ... Because Mexico had no access to further sources of finance, short of a moratorium, it had to use its own "savings".

But Pacto or not, 1988 was not a good year for Mexico, least of all for the majority of Mexicans who had no way to shield their incomes from 100 percent inflation rates and continuing low wages. Everyone was affected by the crisis, except for the elites of the country. No one had had any preparation for these years of zero growth, and everyone was surprised that there never seemed to be any end. "The crisis is permanent" was a popular expression of frustration, to affirm the claim that the term "crisis" was a fraud because it implied a temporary state of affairs. Ordinary people who had been loyally anti-American all their lives were now saying that "only the gringos can bail us out of this".

By mid -1988 it seemed that the adjustment process was finally working, and that Mexico's economy might be on a course for growth, but despite the Pacto there was precious little economic growth, and certainly not enough to stimulate the production of enough new formal sector jobs to justify optimism on the part of most Mexicans.

And the political season was well advanced. An unpopular candidate had been advanced by the official party, Carlos Salinas de Gortari, the brains behind the current economic disaster, a person who was said to be an apparatchik, a técnico that knew nothing about the Mexican people and who was incapable of mobilizing them or demanding the kinds of sacrifice which were daily asked. There had been a split in the official party, the Corriente Democrática had launched a candidacy, that of Cuauhtémoc Cárdenas, who would run unsuccessfully for president and Porfirio Muñoz Ledo who would gain a senate seat for the Federal District. Two senators were elected from the federal district and two senators from Michoacán in the official returns. No one would ever know what the real vote was because the ballots were destroyed. Officially Cárdenas had around 30 percent of the vote, Salinas a little over 50 percent, with most of the rest going to the PAN candidate, Manuel Clouthier, a rousing and charismatic speaker whose style contrasted perfectly with the bureaucratic tone of Salinas, and the sincere-but-clumsy style of Cárdenas.

After the results of the election were announced, over a week after the election itself, Mexico City was extremely tense. Calls were heard to summon the opposition in a series of massive, popular rallies to protest the stealing of the election. Opposition opinion was divided, but the counsel which eventually prevailed was that of retirement so as not the split the country, and not to cause the deaths of many good Mexicans in a bloody encounter with the official party. Ordinary Mexicans were heard to comment about Cárdenas "se ganó pero no se quedó" meaning that he won but he never got to take office.

But the newly installed president, Carlos Salinas de Gortari, was severely wounded. His legitimacy was challenged on every side, and even within his own party. No president in modern Mexican memory had entered office with so many strikes against him.

The Supposed Recovery: the Salinas years.

Within two years, the economy was growing again, the Cardenista opposition had been destroyed in the state and municipal elections, and Carlos Salinas de Gortari was more popular than his predecessor had even been. How had this happened?

First, one recalls that Salinas had been the arquitect of the Pacto, indeed of the entire neoliberal policy. He was magnificently prepared for the policy of continuity. Second, his party had been so soundly rejected in the cataclysm of the 1988 elections that it was desperate for a leader who could enable them to recapture the position of being the natural leaders of Mexico. The way was open for drastic reform of the party, and Salinas' close young associate, and former campaign manager, Luis Donaldo Colosio was the chosen instrument to lead a reformed PRI out of the wilderness. Thirdly, the economy was stabilizing finally, as the inflation figures indicated, and now it was time to introduce a new formula that would stimulate growth for the first time in eight years.

Salinas' first hundred days were a whirlwind of activity, and he turned out to have a genius for both public relations and for the manipulation of the symbols of Mexican history and politics. Most of all, he had to prove that he was a strong leader, and that there was movement at the center of the Mexican political and economic scene, and at the end of the hundred days there were few doubters. He sent the army to arrest the notoriously corrupt leader of the Oil Workers Union, La Quina, as he was known. La Quina had opposed any attempt to bring the oil workers under control, had made public fun of De la Madrid, had openly supported the opposition in the 1988 election, and now he was going to jail for the duration. Salinas moved against businessmen who had failed to pay their taxes, in an unprecedented move, jailed the president of the Stock Exchange, a broker who had engaged in financial manipulations, thus giving some comfort to those who had lost money in the "crac" of the Bolsa. He appeared to embrace the principles of a free Press by jailing a high official for complicity in the plot to murder Manuel Buendía, who had been Mexico's foremost investigative reporter. He assembled a cabinet which The Economist (March, 1993) called the most brilliant in the world.

But in order to create the conditions for the elusive economic growth, a new pact which emphasized economic growth was instituted. Salinas and his team mobilized the support from labor, business and the public sector to institute a new round of reforms. The administration had first to reduce the burden of the external debt which was decapitalizing Mexico, and forcing it to run big trade surpluses just to make the interest payments. A debt moratorium, which had been suggested by the opposition during the campaign was rejected. But without some kind of moratorium the net resources transferred abroad was just under U.S. $ 6 billion a year. He persuaded President Bush and his Treasury Secretary, Nicholas Brady, to become more active in helping settle the problems of international indebtedness, and was one of the intellectual authors of the Brady Plan, which, imperfect though it was, provided a way for Mexico to reduce its interest payments on its debt, and provided foreign debtors with motives to start investing in Mexico again. As Robert Pastor has commented (Pastor, 1993: 18-19) "The agreement was completed in late July 1989, and signed on February 4th 1990, with the Bank Advisory Committee, representing roughly five hundred commercial banks with loans to Mexico. As a result of that agreement, Mexico's external debt was reduced from about $100 billion in 1988 to an equivalent of about $85.8 billion in 1990. ... The ratio of external debt to GDP declined by half to 36.8 percent in 1991; interest payments in 1990 sank to 20 percent of the value of exports, less than half of the proportion paid during the height of the debt crisis."

Aside from controlling the transfer of resources abroad, the Salinas team had to reduce interest rates, and make a serious effort to restrain public sector spending, get the country's fiscal house in order, and attract investment: if not repatriated Mexican capital that had been placed in safer hands abroad, then foreign capital.

Salinas was serious, as was his Finance Minister, Pedro Aspe, about fiscal reform. Although the neoliberal state would not require the great infusions of public money that the Revolutionary state had come to demand, a modern fiscal system was imperative if Mexico was to be able to compete with foreign producers. The government's actions were strong, if somewhat variable. Businessmen complained about "fiscal terrorism" and about the frequent changes in the system, but the effectiveness of the collections was such that revenues were raised by 13.4 percent, even as the PSBR fell from 12.3 percent of GDP in 1988 to 1.5 percent in 1991. (Lustig, 1992:Table 2-1), and the fiscal deficit fell from 11.7 percent of GDP in 1988 to 5.8 percent in 1992. (Pastor: 1993:19). Inflation fell to just under 20 percent in 1989, and was projected for single figures in 1993, a goal that was achieved, though at considerable cost to production and business liquidity. Privatizations went forward, although not without controversy, the most important being the reprivatization of the banks, which had a very salutary effect on interest rates, which began to fall quickly from the mid twenty percent range.

Critics of the government's privatization program claimed that the most profitable enterprises were being sold at bargain prices to friends of the president, and people felt particularly uneasy about the disposition of the copper mine of Cananea which had been an important symbol of Mexican resistance to the U.S. since it was there that miners had been hung by the Arizona National Guard in order to secure the profits and property of Colonel Green, an American owner. People worried about the possible invasion of international capital and ownership of the oil resources. But privatization proceeded, and the oil deposits were maintained as a national monopoly, despite strong and persistent pressure from potential foreign investors and political actors in the United States. They were mollified with a restructuring of the oil industry to permit foreign investment in upstream operations while insisting upon only Mexican public access to the crude. And for ordinary people the improvement in services, especially telephone service, was proof that the privatization program was working, and the fact that the rich were getting rich out of it was so usual as not to cause alarm.

With the prospect of NAFTA, Mexico outstripped the timetable set out in the GATT agreement, import licenses were scrapped, and a maximum tariff of 100 percent was reduced to a average (trade-weighted) tariff of 9.5 percent. Mexico went from being one of the world's most protected economies to one of its more open ones, very quickly.

Investment flowed into Mexico, firstly in the form of direct investment, and then increasingly in the form of portfolio investment. In 1991 US firms started up 56 new projects, but in 1992 only 31, and in 1993 38.[6] Mexico's imports from the United States doubled, and then doubled again as if to convince American businessmen that a free trade agreement was a golden opportunity.[7] Exports to the US increased as well, 24% in the first ten months of 1994, though not enough to offset a persisting deficit in the current account which was at very high levels, reaching more than U.S. 20 billion dollars during 1992 and 26 billion by the end of 1994. This deficit, though huge by historical Mexican standards, was offset by capital inflows throughout the Salinas sexennium, although when the reckoning came in December 1994, it had become clear that short term notes, and foreign reserves had been used to cover this deficit during the period of the election. By April, 1993, the New York Times reported that foreigners, mainly Americans, had amassed $9 billion worth of Mexican securities, or nearly triple their holdings at the end of 1991, and in addition foreigners held $20 billion in Mexican bank certificates of deposit which paid as much as 22 percent interest, at a time when inflation was running annually at a rate of 12 percent.

Arguably, the most important initiative of the Salinas administration was one that had not been contemplated: an agreement on economic integration with the U.S. During the 1980s protectionist sentiment had been rising in the northern neighbor, and Canada had already assured it's permanent place in the U.S. market by signing a free trade agreement. But Mexico's history of strained relations with the U.S. and it's fierce protection of its own sovereignty which had been evidenced in its independent line on Central America, and in the distanced relationship it maintained with the U.S. of Ronald Reagan and his ambassador John Gavin. This distance had made the move decidedly unlikely, especially since it was an enthusiasm of presidential candidate Ronald Reagan, and seen to be no more than a pretext for the Americans to take over the Mexican economy. The advantages of economic integration with the U.S. had long been recognized and advocated by important voices on both sides of the border, not least of all Sidney Weintraub whose book, Marriage of Convenience, providentially appeared in 1990 to provide an strongly argued text for such a move. But, according to many sources, it was the counsel of Margaret Thatcher and Helmut Kohl that convinced President Salinas. At the end of 1989, in a trip to Europe with the purpose, among other things, of seeking investment funds, both these leaders pointed out that European investment was not to be expected since Eastern Europe were going to absorb the better portion of external investment funds of the Europeans. Indeed, they commented, with the United States on its border, surely it was time for Mexico to take advantage of this fact, as Canada had for years, and jettison outworn hostilities and false pride over sovereignty in a world where sovereignty was every day more problematic, and where Europeans had submerged even greater and more recent hostilities in their own common market. What, after all, was the hostility between the U.S. and Mexico, compared to that among England, France and Germany? The U.S. Congress, with labor's voices mostly stilled or ignored, granted the necessary ("Fast Track") authority to the U.S. president to negotiate a trade agreement with Mexico, Canada was added to the negotiation almost as an afterthought, and with the energetic complaisance of the Mexican negotiating team an agreement was worked out very quickly so as to correspond with the political seasons, to be signed on time at the end of 1993 in order to merit favorable mention by the official party in the election campaign of 1994.

In 1994 GDP growth had recovered to 4.5% (third quarter), and inflation was running at 6.9%. Jobs would continue to be a problem: according to the businessman's roundtable (Confederación Patronal) report fewer than 600,000 new jobs were created in 1991, and 500,000 in 1992 in an economy where 1,000,000 people entered the economically active age range every year. In 1992, according to this same source, 42 percent of the employed were working in the informal sector, 29 percent of the labor force was either out of work, not earning, or earning less than the minimum salary, and the economy was losing, rather than gaining manufacturing jobs. The job deficit continued into 1994.

But most economists believed that the crisis was over, even if the recovery was weak. And finally, in November 1993, under U.S. political pressure, wages were raised by 7 percent. By December 1, 1994, the end of the Salinista sexennium, prospects for the Mexican economy looked very good indeed: GDP growth at 4.5%, inflation running at 6.9%, and reported reserves down but still, supposedly, 16.7 billion dollars. But by end of December, 1994, the weaknesses in the Mexican economy would become obvious, and Mexico would have to turn to the US and the world for support of the peso, its foreign reserves well nigh exhausted in defending the peso. The weaknesses stemmed from political events as much as economic processes, as a brief look at politics under Salinas will show.

Political Process under Salinas.

By 1991, Salinas was able to recoup much of the ground that he had lost in the 1988 elections, for, no matter now much cheating went on during the elections in the Federal District and the State of Mexico in the municipal elections of 1991, polls indicated that the President, and to a much lesser extent his party, had recovered enough to dominate the center-left opposition, which had swept these very areas in the presidential election three years previous.

Salinas himself was an important source of recovery. In comparison with his predecessors he was such a dynamic figure, and such a master of public relations that he appeared decisively in charge of the Mexican political scene. There was movement at the center, which had not been seen in many a season, and the Mexican people began to have some hope again. His popularity soared, amazingly for a politician who had been viewed as illegitimate and insignificant during the presidential campaign, and reached levels of 70 percent approval in the fifth year of his presidency, which was unheard of ... at least since Lázaro Cárdenas[8].

Secondly, he instituted a system of what might be called "triage" in the relationship between the state and the different economic sectors. To the rich and the powerful he assigned the benefits of privatization, and these could be immense, resulting in the creation of 24 billionaires in the country by the end of his period, whereas there had been only one at the beginning. Big business and the empresarial class would no longer be protected as they had been under ISI, and would have to compete with foreign capital, but they had their rewards. To the middle sectors he promised a relatively quick recuperation of purchasing power that they had enjoyed prior to the crisis. They would be subject to meritocratic criteria for advancement, and there would be no assurance of well paid jobs in the public sector, as before, but they would enjoy the prospect of salary relief. Indeed, salaries of the new meritorious middle class did improve rapidly after 1991, even though the "undeserving" middle class of former functionaries, schoolteachers, and poorly educated service workers would not share, as González de la Rocha points out in this volume. The poor would get PRONASOL, or the National Program of Solidarity, which would bring the benefits of privatization to their neighborhoods. By 1993, Luis Donaldo Colosio was put in charge of Solidarity, and the program was maintained as one with political objectives. It was never quite clear was Solidarity's budget was, since it had the right to appropriate funds from other agencies to carry out its purposes, building schools with funds from the Secretaría de Educación Pública, for example, but the effort was visible, well targeted to reward friends and to generate political support[9]. The great, sprawling, poor colonia popular, Chalco, on the edge of the Federal District, got electric lights, a visit from the Pope and, to their chagrin, electric bills as a result of the efforts of Solidaridad. The Colonia Jalisco which had been a precarious settlement on the Guadalajara bypass (periférico), received two Presidential visits, a new school a new clinic, sewer connections, secure tenure rights, and cobbled streets and voted strongly for the President's party in the subsequent municipal elections. Most of the funds from privatization sales were being invested in Solidarity.

In the agrarian sector, a different kind of triage was proposed. Big commercial farmers would be required to compete with international producers but be the beneficiaries of policies that guaranteed low wages. Middle size producers would be given technical assistance and access to commercial credit, while small time producers would be the province of special Solidarity funds for their communities, which funds would be administered by committees that were specially selected so as to evade the rural bosses and their allies in the older bureaucracies. Political targeting was important, and, as one Presidente Municipal in Oaxaca explained, it was important not to be an village affiliated with the opposition party, but rather to be the neighbor of such a village, because that way Solidarity would set up a revolving fund of around 50 million pesos (around US $5,000) which could be replenished with a certificate of completion of the project for which the money had been appropriated, and the advantages to toeing the official line would be clear to the demented neighbors. In 1993 PROCAMPO, a program of subsidies to individual farmers was begun, at the rate of N$300 per hectare of land for relief from the drops in the guaranteed prices for dry beans and corn. On election eve, providentially, checks for N$350. were delivered to the small producers.

By the end of the 1993, the president and the PRI looked to remain securely in ascendancy for the future. Then on January 1, the Ejército Zapatista de Liberación Nacional, moved in Chiapas, and at the cost of 123 lives occupied three towns, destroyed some municipal records, and made itself known to the rural population. No one had heard of them, but, because of the communicative talents of their ski-masked Subcommandante Marcos, many people began to sympathize with the rebels. The army was sent in to crush the rebellion, but was stayed, some said by the intervention of Manuel Camacho Solís, the former Regent of Mexico City, who had been the runner-up in the race for the official candidacy, and others said because of pressure from the Clinton administration in the US, that had touted its trade agreement with Mexico as a "win-win" situation with a First World country, and could not abide militaristic backsliding on the part of its neighbor. The Zapatistas were not a security threat to the Mexican state, they were a public relations disaster for them, and they kept up the pressure for democratic reforms all the way through the year.

The second disaster took place on March, when the official candidate, Luis Donaldo Colosio was assassinated in Tijuana, B.C. The administration did what it always had done in cases like this, bungled the investigation and engaged in a cover up, with the inevitable result that rumors of official complicity became widespread.

The new official candidate Ernesto Zedillo Ponce de León was announced, but his choice split the PRI, because the more traditional party members felt that they had been completely left out from the decision.

Disasters come in threes: and on September 28, José Francisco Ruiz Massieu, the reform-minded President of the official party was gunned down in broad daylight in the capital. His murderers were never securely identified, although a PRI politician from Tamaulipas, Manuel Muñoz Rocha, was compelled to flee the country under suspicion.

The Year End Crisis.

By the end of the year 1994, events overwhelmed the young Zedillo administration. The deficit economics of the previous administration, particularly, the deficit in the current account, which had reached 26 billion dollars overwhelmed their ability to pay their debts. The government had tried to paper over the various critical events of 1994 with "cuentos alegres" ("happy talk") and short term paper. The enormous deficits had been covered by foreign investors in past years. Unfortunately, their investments had been made with "hot money", i.e. portfolio investments that could be withdrawn very rapidly. And were withdrawn. Foreign reserves were spent to maintain the value of the peso, as once again former President José López Portillo's lemma "presidente que devalúa, es presidente devaluado" was intoned by administration officials as motive enough not to devalue. It was rumored that foreign reserves had dropped to $3 billion before the Zedillo administration turned to the US for help. And on January 31, 1995 the Clinton administration cobbled together a $40 billion international loan guarantee that could see Mexico out of its short-term liquidity problem.

But if there is little hope for thoroughgoing reform from the official party, or from electoral politics, what of grass roots mobilizations that seemed so important in July of 1988. The social movements that had become so important an aspect of local mobilization were hoped to be a source of political mobilization, but it is not clear that they are. Social movements who earlier had been affiliated with opposition political parties have broken those links in many cases. Solidarity has been sufficiently effective and well funded so as to lure some movements into neutral, or even pro-regime political stances. And still others have achieved their aims and disbanded, or have achieved enough so that their militancy is not as strong as before. We tend to agree with (Brachet-Marquez 1992: 112) who suggests "most of those who have analyzed these movements admit that their role in effecting political change is limited". He cites Foweraker (1989), Foweraker and Craig (1990) and Street (1993) in support of this point of view.[10]

Lastly, it is worth noting the optimistic point of view of those who suggest that the liberalization of the economic regime obliges the same in the political regime. Raymundo Riva-Palacios, one of the directors and columnists in El Financiero has advanced this thesis, and it is widely if somewhat passively accepted by Mexican intellectuals. And certainly some liberalization will occur. For example, it will become harder and harder for the regime to manage the press as it has done so successfully for so many years. The information requirements of potential investors, and the communication needs of new companies are going to require the installation of international standards, and a greater variety of information sources than before. But it is questionable whether the press can reform itself. When the administration suggested in 1993 that the system of payoffs to reporters be terminated, by publishing the names of the recipients and the amounts paid, the uproar came from the press. When Cárdenas was asked what sectors he would privatize in lieu of the Salinista program, he responded "the press and the media". Certainly it is true that television is openly tied to the official party, and that radio, once a source of independent criticism has been brought into the official fold. One is compelled to the conclusion that there is no simple correlation between a liberal economic regime and political liberalism and/or a democratic opening.

The other, and final alternative is a government of national solidarity, a government of all the parties. Jorge Castañeda, Mexico's premier political analyst, started suggesting this during the election campaign. There are some signs that Zedillo is open to it, and it may be the only way that Mexico can be drawn to sharing its wealth and income among its citizens sufficiently to allay the social tensions that are bound to arise with the return of the crisis. But one thing can be asserted with finality. Although Carlos Salinas de Gortari may not get the international job he sought directing the World Trade Organization, there is no doubt that he has finally asserted Mexican dominance in international affairs. The moment that President Clinton guaranteed the Mexican loans, was his moment of triumph. He had finally induced the United States, not only to take Mexico seriously, and to pay attention to Mexico, but to make the Mexican economy their own responsibility.

Bibliography

Báez, Francisco and Enrique González Tiburcio (1989) "Impacto de la crisis en las condiciones de vida: un ensayo descriptivo" in Carlos Tello (ed) 1989.

Brachet-Márquez, Viviane (1992) "Explaining Sociopolitical Change in Latin America. Latin American Research Review. 27:3:91-123.

Cornelius, Wayne, Judith gentleman and Peter Smith eds. (1989) Mexico's Alternative Political Futures. Center for U.S.-Mexican Studies. UCSD, La Jolla.

De Janvry, Alain (1981) The Agrarian Question and Reform in Latin America. Baltimore. Johns Hopkins Press.

Foweraker, Joe (1989) "Popular Movements and the Transformation of the System". in Cornelius et al. (1989)

Foweraker and A. L. Craig (eds.) (1990) Popular Movements and Political Change in Mexico. Boulder, Colorado. Lynne Reinner.

Hellman, Judith (1983) Mexico in Crisis. 2nd Edition. New York. Hoolmes and Meier.

Looney, Robert E. (1987) " Mechanisms of Mexican Economic Growth: The Role of Deteriorating Sources of Growth in the Current Economic Crisis". Journal of Social, Political and Economic Studies 12: 77-94.

Lustig, Nora (1989) "Crisis Económica y Niveles de Vida en México (1982-1985) in Carlos Tello (ed.) (1989) Mexico: Informe sobre la Crisis (1982-1986). Mexico. CIIH-UNAM.

Lustig, Nora (1992) Mexico: The Remaking of an Economy. Washington D.C. Brookings.

Martinez Navarrete, Ifigenia (1989) Algunos efectos de la crisis en la distribucion del

ingreso en Mexico. 1. ed. Mexico, D.F.

Pastor, Robert A. (1993) Integration with Mexico: Options for U.S. Policy. New York. Brooking & the Twentieth Century Fund.

Peterson, Judy (1994) "Identity, Subjectivity and the Women of Guadalajara" (provisional title) Ph.D. dissertation. Department of Anthropology. University of Texas, Austin.

Reynolds, Clark (1980) A Shift-Share Analysis of Regional and Sectoral Productivity Growth in Contemporary Mexico. Luxemburg, Austria. International Institute for Applied Systems.

Street, Susan (1993) "El papel de los movimientos sociales en el analisis del cambio social en México" Revista mexicana de sociología.

Tello, Carlos (ed.) (1989) Mexico: Informe sobre la Crisis (1982-1986). Mexico. CIIH-UNAM.

Valverde, María de la Luz (1991) Presidential and Bureaucratic Policy Making: The Case of Mexican Oil Policy. Unpub. Ph.D. dissertation. Department of Governnment. University of Texas (Austin).

Weintraub, Sidney (1990) Marriage of Convenience; Relations between Mexico and the United States. New York. Oxford.

[1] The figure of 50% is approximate and was taken from President Salinas de Gortari's speech to the Economic Forum of 1992, as reported in NEXOS. The figures for median incomes are taken from Selby et al. 1994, and calculated from our 1978 INDECO data, as compared to the ENEU (National Survey of Urban Employment) collected by the INEGI (National Informatics and Geographical Institute) for the 4th quarter of 1989. A conversion figure of 166.1 was derived from the inflation tables supplied by the Banco de México, to translate the 1978 pesos to 1989 (mid-November) ones.

[2] A sophisticated account of the intragovernmental, and sectoral negotiations that took place over the oil policy is to be found in a forthcoming book by María de la Luz Valverde, based on her dissertation (Valverde, 1991).

[3] Cuaderno de Información Oportuna, No. 155, febrero 1986:40-42, cited in Lustig, 1989)

[4] Comments like this are based on continuing field work during the period in the Metropolitan zone of Mexico City, Oaxaca (villages and city) and in Guadalajara.

[5] The New York stock market lost 23% on the Dow Jones Industrial average on Bloody Monday in Octber of 1987, but recovered, beginning the next day. The Bolsa of Mexico City lost over 60 percent of its value in the month after that New York crash. It has, of course, since recovered also, but the shock lingered longer in 1987 adding to the dismal financial picture of the crisis years.

[6] Mexico/Nafta report, 19 January 1995, London.

[7] Data from the Mexico/NAFTA report, 19 January, 1995, London.

[8] Poll results are reported from the public affairs magazine Este Pais, which commented on these extraordinarily favorable results during the summer of 1993.

[9] The official budget allocations for PRONASOL were US$680 million in 1989, $950 million in 1990, and $1.7 bn in 1991.

Various studies have shown that Solidarity has not generated political support, but no study has been done at a sufficiently disagregated level (say, at the level of the municipio) to show the consistent statistically demonstrable effects. This lack of poliotical payoff is paradozxically pleasing to the official party, since it shows that the program is not "politically conceived" but rather "administrative in nature", in no way designed to buy votes. Every sane politician knows better however, and local reports from investment sites show clearly an increase in support for the President, and to a lesser extent his party, as a result of Solidaridad.

[10] But see Peterson (1994) for a more detailed case study of the case of Guadalajara.