Chapter 2: the basics of mexican industrialization: 1950-1970

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(Written 1996)
The Mexican economy today faces severe economic problems. Falling standards of living, high rates of unemployment and underemployment, high rates of inflation, high interest rates, high foreign debt, widening inequality, and so forth ----the problems seem almost insurmountable. But

it was not always this way. Until the mid-1970s, people talked of a "Mexican Miracle" and considered Mexico as the "Japan of Latin America". How the Mexican economy went from such

heights to such depths is the subject of the remainder of Part I.

First, let us examine the record. From 1950 to 1970, Real Gross Domestic Product (GDP) in Mexico grew at a rate of about 6.6% per year--- 3% to 4% per year per capita. (Real GDP is the value of all final goods and services produced in Mexico in the year adjusted for inflation). Inflation rates were generally in therange of a modest 3% to 4%. By 1970, Mexico was basically self-sufficient in food, steel, petroleum, and most consumer goods. If you examine the table below, you will see that the growth of real GDP and real GDP per capita slowed in the mid-l970s. This was the first sign of a serious economic problem for Mexico. The economic problem was not seen then because Real GDP began to grow rapidly from 1978 to 1981. This is the oil boom. Beginning in 1982, real GDP growth slowed significantly; it even declined in several years. These are the years of "1a crisis"! Following resumed growth in the early 1990s, the Mexican economy collapsed in 1995.

The table below shows another important aspect of the Mexican record: Mexico has had one of the world's highest rates of population growth. In the early 1950s, birth rates exceeded 46 per 1000 population. With death rates of about 16 per 1000 population, the Mexican population grew at about 3% per year. At this rate, the population doubles approximately every 24 years. By the late 1970s, the birth rate had fallen to about 37 per 1000 population. However, the death rate had also fallen (to about 8 per thousand population) so that the population was continuing to rise at nearly the same 3% per year. This increase in population absorbed much of the increase in production. From 1940 to 1970, Real GDP per capita grew at only 1.23% per year. From 1970 to 1988, it grew again at about 1.2% per year; however, most of this growth occurred in the oil boom years. During the l980s, real GDP per capita actually fell. However, in

the 1980s, the rate of population growth finally slowed significantly due to a major government program. High birth rates have meant that the population is very young and that a large percent of the population are dependents (i.e., not in the labor force). As of 1980, 44.6% of the Mexican population was under age 15 and only 30.1% of the population was in the labor force.

Yet a third aspect of the Mexican record is shown in the table below: the structure of the Mexican economy has changed considered as it developed. Note that there has been a large shift of both production and employment out of agriculture, although the share of employment in agriculture is still high by the standards of industrial countries. Note also that productivity in

agriculture is quite low (in l980, 32% of employed people produced only 8% of the output). Finally, note that most of those who left agriculture became employed in services rather than industry (although much of what is called"services" is really disguised unemployment).

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Year GDP Population Real GDP Per Capita
1971 4.2% 3.3% 0.9%

1972 8.5% 3.4% 5.1%

1973 8.4% 3.3% 5.1%

1974 6.1% 3.3% 2.8%

1975 5.6% 3.1% 2.5%

1976 4.2% 3.0% 1.2%

1977 3.4% 3.0% 0.4%

1978 8.3% 2.9% 5.4%

1979 9.2% 2.8% 6.4%

1980 8.3% 2.7% 5.6%

1981 8.8% 2.5% 6.3%

1982 -0.6% 2.3% -2.9%

1983 -4.2% 2.1% -6.3%

1984 3.6% 2.2% 1.4%

1985 2.6% 2.2% 0.4%

1986 -3.6% 2.3% -5.9%

1987 1.7% 2.0% -0.3%

1988 1.4% 2.0% -0.6%

1989 3.1% 2.1% 1.0%

1990 4.4% 1.9% 2.5%

1940 1950 1960 1970 1980 1990-1993

Share of Real GDP
Agriculture 21% 17% 16% 12% 8% 7%

Industry 24 27 29 34 37 39

Services 55 56 55 54 54 54
Share of Employment
Agriculture 65% 58% 54% 38% 32% 25%

Industry 16 16 19 23 26 29

Services 19 26 27 39 42 46

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Detailed Structure of the Mexican Economy (1993)

Percent of GDP

Farming 7%

Mining 3%

Manufacturing 23%

Construction 5%

Electricity 1%

Transportation 7%

Commerce, Hotels and Restaurants 26%

Other Services 28%

(Finance, Real Estate, Social & Personal Services)

From this brief introduction to the record of Mexican economic performance, let us now examine Mexico's development strategy: the ways by which Mexico tried to achieve economic growth and development. Of the many aspects of the development strategy, let us focus on

three important ones: trade policies, agriculture, and the role of the government.

Trade Policies
The most important feature of the Mexican development strategy was the adoption of import-substitution industrialization in the 1940s. In this strategy, industrialization was to occur through the development of Mexican consumer goods industries. To allow these consumer goods industries to develop, imports, especially from the United States, had to be restricted (because the small Mexican companies could not yet compete with the larger American companies). Imports were restricted partly through high tariff rates. But the most important means used to restrict imports was the license requirement --- licenses had to be obtained from the government to import foreign-made products. Because licenses were rarely granted to those wishing to import consumer goods, only 3% to 4% of all consumer goods typically were imported. To produce these consumer goods, Mexican companies needed capital goods. Since the Mexican capital goods industry was quite small, licenses were issued relatively freely to those who wished to import capital goods. The licensing policy was reinforced by a policy of keeping the peso overvalued in relation to the dollar.

From 1954 to 1976, 12.5 (old) pesos were the equivalent of one dollar. In terms of buying power, $1 would buy more than 12.5 pesos. The rate of 12.5 pesos for $1 kept imported products artificially cheap for Mexicans and Mexican products artificially expensive for Americans. Because of the licensing procedures and the overvalued peso, more than half of all capital goods were imported. By keeping capital relatively cheap (since the peso was overvalued), the

import-substitution industrialization policies provided incentives for Mexican companies to use

capital-intensive production. (This means producing in a way that uses a large amount of machinery combined with relatively few workers.) However, capital-intensive production does not

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create many jobs, which is especially important given the very high population growth Mexico was experiencing. The approach was therefore inappropriate for the Mexican situation. In choosing an import-substitution industrialization strategy, Mexico was choosing not to rely on its exports to promote economic growth (in contrast to the approach of the Porfirato). Mexican leaders believed that relying on exports would make Mexico dependent upon other countries, especially the United States. This dependency could have serious economic and political repercussions for Mexico. For example, a minor recession in the United States could reduce American purchases of Mexican goods so much as to cause a major depression in Mexico. Mexican leaders also worried about the prices of the main export products, which would be natural resources (agriculture, livestock, fishing, and forestry products) or processed food products. These prices of these natural resources are subject to considerable instability, but the long-run trend has been downward. Mexico's main export products have inelastic demand, both with respect to prices and to income. This means that, as the prices fell, people in other countries would buy very little more than they had been buying. And, as world incomes rose, the desire to buy Mexican export products would rise very little. The worry about dependency was surely influenced by the fact that about 60% of Mexico's trade was with the United States. While Mexico did export to earn dollars to pay for the imports of capital goods, exports were never the leading sector in Mexico's development strategy. The export earnings were not sufficient to pay for all of Mexico's imports. The rest of the imports were paid for by international borrowing. Until the mid-1970s, the level of Mexico's international borrowing was not so high as to create problems.

Because American consumer goods producers could sell little in Mexico, they desired to locate subsidiaries or branches to produce in Mexico. Many were able to do so. However, the Mexican government did reserve certain activities for Mexican nationals and did place some restrictions on American direct investment in Mexico. This entire topic is the subject of a later section in Part II.

As a result of the import-substitution industrialization strategy, Mexican resources were shifted to the production of consumer goods for the Mexican market. Because of the very

unequal distribution of income, it was most profitable to make luxury items for the rich. And because of the lack of international (and domestic) competition, the Mexican consumer

goods companies produced products of poor quality and sold them at high prices (average prices were 15% to 20% above international levels; some prices were 50% to 100% above

international levels). Economists have long debated the desirability of import-substitution industrialization. But it is very clear that, in a country like Mexico where the distribution of income was so unequal and the level of domestic competition was so low, the import-substitution industrialization strategy had serious flaws. Those who produced consumer goods for the domestic market benefited greatly from import-substitution industrialization and became a major political force for the its perpetuation.

In any country just beginning the experience of economic development, most people live in rural areas and work in agriculture. Because of this, the agricultural sector has a major role to play in any development strategy. A prospering agricultural sector provides food and raw materials for industry, a labor force for manufacturing, export products to pay for imports of capital goods, and
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savings to finance the capital goods needed for industrialization. A prospering agricultural sector also creates a demand for locally produced products. The problem facing Mexican policy-makers was to find ways to achieve this prospering agricultural sector, especially given the fact that farms in Mexico are often very small. (As of 1970, nearly half of Mexican farms were under 12 acres. The average farm in 1960 was only 4 acres.)

Compared to many developing countries, Mexico decided to devote a relatively large amount of resources to the development of agriculture. With American aid and technical advice, large amounts of money were spent on irrigation works, roads, farm machinery, etc. Agricultural production grew rapidly up to 1970; growth rates of agricultural production were 4.4% per year in the l950s and 3.3% per year in the l960s. By 1970, Mexico was basically self-sufficient in food. What occurred in Mexico is popularly called the first successful example of the "Green Revolution". Fully one half of the increase in production was due to increases in agricultural productivity. Agriculture was able to provide a large part of the export revenues that were used to pay for the imports of capital goods under the import substitution industrialization strategy. After 1970, however, investment in agriculture fell and growth rates of agricultural production fell accordingly. Mexico was forced to resort to imports of essential food products, such and corn, beans, and wheat! While the government' s policies up to 1970 increased agricultural

production overall, they also created what is called "agricultural dualism". Most of the money for investment went to irrigation projects and roads in the north and northwest states where landholdings are of large size and where much of the production goes for export to the United

States (and where, not coincidentally, much of the land is owned by people with political influence). Little was provided for those in the central plateau area or in the south. In these areas, the combination of low investment spending by the government and the very small plots

perpetuated traditional agricultural methods with very low productivity. In addition, government agricultural price policies have set prices to favor production of cattle, tomatoes, strawberries, etc. for export to the United States rather than corn and beans for the domestic market.

In summary, this dualism involves about 400,000 farms on very large landholdings located in the north and northwest producing mainly export products, on the one hand, and about 2.5 million very small landholdings located in the central plateau and the south producing with low productivity on the other hand. Those in the central plateau and south are very poor. More than half are purely subsistence farmers --- they neither buy nor sell in markets. In addition, there are about 600,000 to 700,000 landless workers, with an estimated income in 1989 of $232 per year. A 1980 study concluded that 90% of the rural population had some degree of caloric and protein deficiency; almost one-half of these people suffered from a significantly inadequate diet. Up to four million rural people had no access to land. There are at least three reasons that this poverty and malnutrition did not lead to a greater tendency toward protest. First, the peasants in the central plateau and the south were often organized into ejidos. This organization provides a form of security. See Chapter 1 for a discussion of the ejido. Second, local leaders in rural areas have often been co-opted by the government. These leaders trade allegiance to the government in exchange for economic and political benefits as well as assurance of their control over the local areas. Thus, rural protests lack adequate leadership. Third, there has been a large-scale migration of peasants who could not earn even a subsistence living from their landholdings. Part of this migration went to the urban areas of Mexico, especially Mexico City. And part of the migration came to the United States. This latter part will be discussed later.

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The Role of the Government

In examining trade and agricultural policies, we have also been focusing on the role of the government in creating economic development. But the Mexican government affected economic development in other ways. One way was through the parastatal sector. Parastatal corporations are owned by the government. The chief executive is appointed by the government, but is not

a minister nor other member of the government. The goal of the company is to make profits, subject to meeting certain goals considered to be in the social interest. By the late-l960s,

there were about 400 corporations that were parastatal or at least partially government-owned. They were found mainly in the following industries: petroleum, electric power, steel,

railroads, and fertilizers. Their profits were a major source of the government's revenues. Through these revenues and through control over the policy decisions of these corporations, the government was able to influence the investment rate (investment spending as a percent of GDP). The investment rate in Mexico was over 20%, somewhat above the rate typically found in the United States, but well below the rates found in many Asian and European countries. Of all of the investment spending in Mexico, about 40% was done by the government. And of the government's investment, about half was in infrastructure, such as the irrigation projects described above. The other half went to industry --- large-scale public investments in steel, oil,

railways, electrical capacity, etc. --- done through the parastatal corporations.

Besides the parastatal corporations, the Mexican government also regulated the activities of many of the private corporations. Activities that the government wished to eliminate were made illegal or were otherwise penalized. Activities that the government wished to encourage were often subsidized. And price ceilings were placed on certain products. For example, price ceilings and subsidies were used to keep food prices low in urban areas. This allowed private companies to be able to recruit a labor force while paying low wages.

Despite the importance of government investments and subsidies, government spending in total as a percent of GDP was quite low (about 20% to 25%). Thus, a second way that the government affected economic development was by keeping taxes low. In fact, tax revenues as a

percent of GDP were lower in Mexico than in any other Latin American country. Despite the government investment spending and subsidies, the government could maintain low taxation and also borrow very little from the public (less than 10% of all savings) because its expenditures for defense and social programs were so low. Social programs include education, health, public assistance, social security, etc. Low business taxes allowed for high profits to pay for private business investment spending on new capital goods. Low borrowing freed private savings to also finance private business investment spending. While this approach enhanced profits and business investment spending, it also perpetuated poverty, limiting the growth of a domestic market in Mexico. And it reduced the productivity of the workforce by denying people access to adequate education and health care.

Two final aspects of the role of the government were its population and labor policies. Until the l970s, Mexico had no specific policy to reduce the rate of growth of the population. Some people even believe that the government contributed to the high rates of population growth by subsidizing housing, food, etc., and therefore reducing the cost of raising children in the cities. And, in regard to labor, the government failed to enforce the minimum wage and employment conditions laws for
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the small-scale, labor-intensive producers (although these were enforced for the larger enterprises). The government also gained control of unions through the development of "official unions" which became part of the PRI. (see the Appendix on the political system in Mexico). Through this control and through a centralized process of wage bargaining that set minimum wages by region and by job, the government helped to keep wages low for the businesses

The goal of the government was to transfer resources into manufacturing. It accomplished this in several ways. First, the prices for industrial products rose faster than the prices of agricultural products. Second, the government provided manufacturing businesses cheap electricity, cheap fuel, and cheap railroad transportation through its subsidized state owned enterprises (parastatals). Third, the government invested in infrastructure in urban areas where manufacturing enterprises were located. Fourth, the government gave good credit terms to manufacturing enterprises through its control over the banks and through its own credit provision. Finally, by deliberately keeping the peso overvalued, the government burdened agricultural producers (who were exporters) and benefited manufacturing enterprises (who were importers).
In the l960s, people talked of a "Mexican Miracle". Yet, by 1970, major structural problems were becoming evident. First, the high rates of population growth had not been addressed. With low productivity in agriculture and with industries using capital-intensive techniques in production, many people moved into urban areas that were not able to handle them, commonly becoming unemployed or under-employed. Second, the distribution of income was very unequal and was becoming more unequal. Third, not only were tax revenues low, but income taxes were easy to evade. The government was forced to rely on indirect taxes (such as sales taxes), which are regressive (that is, they take a higher portion of income from the poor than from the rich). Fourth, education had been neglected. Mexico devoted less than 3% of its GDP to education. In the mid-l960s, only two-thirds of to l4 year olds were in primary school and only 28% of l4 to l8 year olds were in secondary school. About one-third of the population was illiterate. Health care had also been neglected. Up to half of the population were not able to receive modern medical care.

From 1940 to 1970, Mexico had definitely been a businessman's government. Despite this, agricultural output was beginning to stagnate, internal savings were less than the amount needed for investment, necessitating foreign borrowing, no domestic capital goods industry had developed, and Mexico was heavily dependent on foreign businesses for technology. In the late l960s, there was the beginning of a protest movement that culminated in violence at the time of the Olympic Games in l968. This led to repression by the government, including the killing of many people. It also led to the populist administration of Luis Etcheveria in 1970.

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