The Spark

“The emancipation of the working class will only be achieved by the working class itself.” — Karl Marx

Mexico:
The Crisis that Wasn't Supposed to Happen

Feb 9, 1995

On December 20, the Mexican government devalued the peso, setting in motion a crash that shook the entire international financial system. The peso and the Mexican stock market lost about 40 per cent of their value against the U.S. dollar, and Mexico's banking system and government tottered close to bankruptcy. Only a 50 billion dollar international rescue effort put together by the U.S. and the IMF (International Monetary Fund) was able to stabilize the international markets, at least temporarily.

This was the crisis that was not supposed to happen. Over the last several years, the Mexican government in concert with the international business community had been proclaiming that the country was preparing to join the ranks of the advanced industrial nations. Since the debt crisis of 1982, the Mexican economy had been overhauled. It had been opened up as never before to international trade and investment. Much of what had been state owned was privatized. Its industry and agriculture were supposed to be emerging as more modern, efficient, and competitive on the world market.

In recognition of this, Mexican representatives began to be accepted into the summits of international finance and business. In 1986, Mexico joined GATT, the world trade organization. In 1993, Mexico joined the U.S. and Canada to form the largest trade bloc, NAFTA. And in April 1994, Mexico joined the OECD, the club of the 25 richest countries in the world.

So what happened? What kind of transformation did Mexico go through in the last 12 years? And what does the present financial crisis reveal?

Economic Reforms: Capitalist Modernization

The economic reforms initiated by the Mexican government date back to the 1982 international debt crisis, when Mexico, as well as a host of other underdeveloped countries, failed to make interest payments on record international debts. The Mexican economy had already been mired in the world-wide recessions of the 1970s. Reliance on growing oil exports had put off the consequences of this crisis. But once the price of oil fell, the Mexican economy was left practically bankrupt. The flight of domestic capital to the tune of over 50 billion dollars exacerbated this crisis.

Up until that time, Mexico had officially pursued a protectionist economic policy especially as a means to fight off economic domination by the U.S. This stance was a heritage of the Mexican Revolution of 1910 to 1917 and the social upsurges 20 years later which resulted in the nationalization of the oil industry under President Lazaro Cárdenas. But with the debt crisis of 1982, Mexico was vulnerable to the pressures of international finance, through the IMF and the World Bank, which were mainly concerned with Mexico's repaying its enormous debts, private and public. The money to pay for this could come only from export-oriented industries and agriculture. To build up these industries, Mexico had to attract foreign investment.

The Mexican government attracted large multinational companies in the usual ways – by cutting taxes and providing land, administrative facilities and credit for industrial parks. Starting as far back as 1965, the Mexican government had begun to open up free trade zones where multinationals built up the so-called "maquiladoras". But the growth of the maquiladora system really took off in the 1980s, as they sprang up along Mexico's largely underdeveloped U.S. border and around Mexico City. By the early 1990s, the maquiladoras employed over half a million people, or about 10 per cent of the industrial work force. And this number has continued to increase, even after the passage of NAFTA.

With the Mexican market opened up, more modern, export- oriented factories began to take the place of the older, less efficient factories in the industrial heartland around Mexico City, Guadalajara and Monterrey. Contrary to popular belief, the export-oriented manufacturing sector in Mexico consists of more than low-technology and labor-intensive assembly plants. In the 1980s, Mexico became an export platform for many high-tech goods. Many of the country's new manufacturing plants are among the most sophisticated in the world, employing the latest in technology and work-organization systems. Sanyo televisions, Whirlpool appliances, IBM computers, Caterpillar forklift trucks and Kodak cameras are among the products being manufactured in these high-tech factories.

Since the 1980s, the automotive industry has been the centerpiece of this wave of industrialization, with the U.S. Big 3, as well as Nissan and Volkswagen, opening up major assembly and parts plants. Currently, there are about 160,000 auto workers in Mexico. From 1989 to 1993, assembly of cars and trucks practically doubled from a half million to one million units per year, built partly for the home market and partly for export, either to the U.S. or to the rest of Latin America. One city, Saltillo, only a few years ago made sinks and appliances, but no cars. Now it is one of North America's biggest auto-making centers, with 2 GM plants, a Chrysler engine plant, and a Chrysler assembly plant that is just being completed. Most of the parts from these plants, of course, come from abroad. At Ford's assembly plant in Hermosillo, for example, which produces Mercury Tracers and Ford Escorts, 15 per cent of the parts are supplied from Mexico, 20 per cent from Japan, and 60 per cent from the U.S. One Ford official commented that the plant brought together, "U.S. managers, European technology, Japanese manufacturing systems and Mexican workers." In 1980, Mexico had a net trade deficit in autos and auto parts of 1.5 billion dollars. Ten years later, it was running a net surplus of an equal amount. And this surplus has gradually widened.

At the same time, the government moved to encourage the modernization of agricultural production, also with the goal of producing what was most marketable overseas and importing what Mexico produced less efficiently. This meant moving away from the old policy of making Mexico agriculturally self-sufficient, which it had been able to achieve in the 1960s. A highly centralized commercial agricultural sector emerged as a result of substantial public investments in irrigation, rural road networks, agricultural research, production of high-yielding varieties of seed, and new cropping systems. Financed by generous agricultural credit-subsidy programs and public works, these commercial farms forged a new economy in the areas in which they operated, quickly transforming Mexico into an important participant in the international market for fruits, vegetables and cattle. And they opened up vast new territories for this cultivation. Thus, between 1982 and 1990, Mexican agricultural exports to the United States more than doubled, with some products exported to Europe.

Finally, the Mexican government moved quickly to privatize most of the 1,155 enterprises that it owned. The government justified this program as an effort to direct state resources toward social services and paying off part of the crushing international debt, rather than sinking more money into state corporations in order to modernize them. Some of the money from these sales went to Salinas's anti-poverty program, called the National Solidarity Program (Pronasol), whose budget progressively grew from 547 million dollars in 1989 to 2.54 billion dollars in 1993. By 1989, Mexico's foreign debt had been reduced from 107 to 98 billion dollars.

To a certain degree, the Mexican economy met many of the goals set by the Mexican government and the IMF. It had been transformed and modernized, with large firms dominating industry and agriculture. This was facilitated by a growing flow of foreign direct investment. In the 1980s, labor productivity rose steeply, by 30 per cent, while the cost of labor dropped by 30 per cent. The value of exports rose 7 per cent per year. And more and more, industrial products dominated exports, growing from 21 per cent share in 1980 to a 47 per cent share in 1990. In the 1990s, these numbers continued to increase. Mexico became the second largest exporter to the U.S., after Canada, with overall trade approaching 100 billion per year. At the same time, the Mexican government had succeeded in bringing raging inflation under control. And the government itself was able to balance its budget, and even run a budget surplus.

For all these reasons, Mexico was put forward by the international financial community as the example of what the "emerging" economies could be.

Contradictions: Debt and Speculation

And yet, this modernization faced enormous contradictions. First, the huge debt, both public and private, continued. Although it shrank in relationship to the GDP, it continued to be a big drain on the economy. Between 1982 and 1991, Mexico made 125 billion dollars in payments to service its international debt, about two-thirds of which was in the form of interest. In the last 5 years, the payments cost an average of 35 per cent of exports. And so in the last years, Mexico was back on the international financial markets, borrowing more heavily, pushing the debt back up.

And Mexico's trade deficit began to widen. Certainly, Mexico had developed into an export engine. But it had become a bigger engine for imports. The demand for imports was fueled partially by its export industries, which needed to import raw materials, machinery and parts. Besides that, Mexico's formerly protected markets for consumer goods were opened to imports, which more and more crowded out Mexican products, both industrial and agricultural. To cover this deficit, Mexican banks and the government began to borrow more heavily on the international financial markets.

Before, these deficits had been financed by big lending institutions. But increasingly, the banks were joined by U.S. mutual funds, searching for much higher returns at a time when interest rates in the U.S. were going down. To get the higher rates, the mutual funds had to take bigger risks in the so-called "emerging" markets. But Mexico looked safe. It had become the IMF's model debtor, making its payments on its international debt on time. Mexico became a favorite for mutual funds.

At the same time, the privatizations created new companies that sold their stock on the Mexican stock market. And soon the stock market also became a favorite for not only big finance, but for mutual funds. The highly profitable speculative fires began to feed on themselves. In 1992 and 1993, the Mexican stock market doubled in value. Mexico attracted a big part of the speculative capital searching for profits among the popular "emerging" markets.

The Mexican stock exchange also created instant billionaires out of a few families with connections to the Mexican government, who had gotten in on the privatizations. Mexico leaped into fourth place in the world with 23 billionaires. According to Forbes magazine, Mexico is behind only the United States, Germany and Japan – but is well ahead of such old powers as France and Great Britain in the number of billionaires.

But the growing deficits and the speculative bubble could grow for just so long. Already in the first months of 1994, U.S. interest rates began to rise, slowing the flow of money to Mexico. Inflation began to spurt and the peso began to come under increasing pressure on the international currency markets. Facing the problem, the Mexican government could have devalued the peso or let higher inflation do it for them. Instead, it raised interest rates as a way to continue to attract capital.

For the current Mexican government this could not have come at a worse time. 1994 was an election year. The ruling PRI (Institutional Revolutionary Party) was facing a difficult campaign. So the PRI behaved as any party in power would, by trying to buy some time. President Carlos Salinas de Gortari got some help from his American friends. Bill Clinton's Treasury Secretary at the time, Lloyd Bentsen, announced that the U.S. government would open up a 6 billion dollar credit line for Mexico's government. With this injection of fresh capital in the Mexican financial system, the storm over the peso and inflation abated. The election went off in August without the Mexican economy collapsing. The PRI practically swept the election, with Salinas's choice, Ernesto Zedillo leading the way. With the government continuing in the same hands, the peso and Mexican stock market even strengthened.

Wall Street, as well as European investment houses continued to remain publicly optimistic about the Mexican economy. But, explained Professor Rudi Dornbusch of MIT, shortly before the December 20 devaluation, big investors moved 15 billion dollars from peso-based investments into peso bonds whose value was linked to the dollar and thus was protected. Said Dornbusch, "Although they may still have been talking [about the attraction of Mexico] a lot of guys used the back door."

The stage was set, and a huge bubble of speculation burst. Most likely, this crisis was exacerbated by the panic of smaller investors in the mutual funds.

Built-in Limits of Modernization

At least for the rich in the financial markets, they enjoyed a boom – up until the collapse. But for the mass of the population, this modernization never provided the kind of prosperity that was promised. First, despite the last 12 years of modernization, the Mexican economy never did "take off". In the first five years of the reforms, Mexico's GDP (Gross Domestic Product) did not grow at all. In the next 5 years, GDP averaged less than 3 per cent growth, that is, lower than the rate of its population growth. And in the last two years, the rate of growth dropped again, flirting with a new recession. In other words, the economy has continued to stagnate.

One reason for this is that the Mexican government has geared production to export, undercutting industrial and agricultural production which satisfied domestic demand. Starved of capital or government aid, the old, traditional industrial base for the domestic market has been unable to compete with foreign production, and has withered. At the same time in the countryside, while the large latifundias produce for export, they are squeezing out the small producers of such staples as corn and beans, with more and more of even these staples being imported.

The government has also imposed a very harsh austerity on the working class and poor, even while productivity has increased dramatically. They say this is necessary to reduce demand for imported consumer goods. But obviously this austerity has also helped the large multinationals make even greater super-profits off their investments. At the same time, the government has cut its own budget, thereby neglecting the already broken down infrastructure and overwhelmed social services.

One result of austerity was the fall of the purchasing power of the minimum wage, which was cut by two-thirds. Today, Mexico has one of the lowest minimum wages in the world, equal to about 10 per cent of the low minimum wage in the U.S., 25 per cent of South Korea, and 40 per cent of Singapore. Most other Latin American countries have a higher minimum wage than does Mexico. The government claims that it doesn't need to raise the minimum wage because about 85 per cent of industrial workers make more than that anyway, about 2.5 times more. But according to a Mexican government study, 60 per cent of workers in rural areas make less than the minimum wage – when they can find work. And the low minimum wage adds pressure on the wages of industrial workers, who still make at least 10 per cent less today than they did at the start of the 1980s. The social consequences of these lowered wages are enormous. Almost everyone in a family has to work, either as wage workers or in the expanding informal sector, as, for example, peddlers. And many workers are forced to moonlight at several jobs.

Unemployment in Mexico has also gone up, as the state sectors shrank, leading to mass lay offs, and as agribusinesses' large plantations and ranches, called latifundias, squeezed millions of peasants off the land. How much unemployment there is, though, is open to debate since government statistics notoriously understate the problem. For example, the government does not take into account rural unemployment. Currently the government claims that unemployment is 3 per cent – although most experts measure it at more than 20 per cent. On top of that, underemployment affects another 25 to 40 per cent.

Often the unemployment problem is blamed on the high rate of growth in the population. In fact, this growth rate has been cut almost in half, from 3.5 per cent in the 1970s to about 2 per cent in 1990. However, the increase has not yet been reflected in the growth of the economically active part of the population, which is still expanding at 3.5 per cent annually, which means that the economy would have to expand by 7 per cent annually to absorb about 1 million new workers every year, which it is obviously not doing.

What this adds up to is that almost half of Mexico's population of 95 million people lives below the government's own poverty line, with about 20 per cent living in abject poverty. Compared to that, the government's Solidarity poverty program of a couple of billion dollars per year is small potatoes indeed, that is, if it even did what it claimed to do. Unfortunately, the Solidarity programs are often controlled by local political bosses, who use them to augment their own wealth and power, against the population.

Modernization carried out in the interests of imperialism and the Mexican bourgeoisie has drastically increased social and economic polarization. The share of wages and salaries in the national income dropped from 45 per cent in 1976, to 37 per cent in 1981, to 28 per cent in 1989. By contrast, the share received by capital increased from 54 per cent in 1981, to 62 per cent at the end of the decade. The consequences of what is shaping up to be a second depression in the last 12 years, the Mexican population is only now beginning to pay for.

Mexico, with its vast potential and resources as the world's 11th most populated country, and the 13th largest in land area, has a GDP that is the 15th largest, second only to Brazil in Latin America. It is also the 5th largest producer of oil in the world. Yet, it remains very much an underdeveloped country, racked by contradictions and instability.

The Political Crisis

The consequences of the speculative crash are only now being played out. Newly elected President Zedillo's December promises that finally the Mexican population will be able to begin to enjoy some fruits of economic growth have been long forgotten. Even with the currency and stock markets at last stabilized – at much lower levels of course – the Mexican government still faces a growing debt, meaning higher debt payments, and a bail-out of a banking system that is on the verge of collapse. As a result, the economy is expected to take a dive back into depression, with inflation going through the roof.

The methods of dealing with this crisis will certainly be a variation of what was imposed in the 1980s: austerity; further privatization of what is left of the state sector; more openings to imperialist control, for example, in the use of oil revenues as collateral for the new U.S. loan guarantees. For the Mexican bourgeoisie, and above all for the scions of Wall Street and Washington, the question has to be the ability of the Mexican government to manage this latest crisis, that is, to impose the necessary sacrifices on the working class and poor and keep order.

The last 12 years have already gone a long way in discrediting the PRI. Ordinarily, in that case, the ruling party could be jettisoned for a less discredited party. That is the beauty of a two-party system, in richer countries which can afford it. However, the PRI is more than just a political party. It has ruled Mexico for over 65 years, longer than any ruling party in the world, making it, in the words of the Peruvian novelist, Mario Vargas Llosa, "the perfect dictatorship." Speaking at a conservative forum in Mexico City, he explained to the consternation of his hosts, "It may not seem to be a dictatorship, but it has all the characteristics of dictatorship: the perpetuation, not of one person, but of an irremovable party, a party that allows sufficient space for criticism, provided such criticism serves to maintain the appearance of a democratic party, which suppresses by all means, including the worst, whatever criticism may threaten its perpetuation in power." The centralization of political power rested in the hands of the all-powerful presidency. But the office of president could only be occupied for one 6-year term. Thus, the PRI was the dictatorship of a ruling clique, that regularly renewed itself at the top.

The PRI's roots go back to the tumultuous period following the Mexican Revolution. That revolution had allowed the nationalist bourgeoisie to gain some independence from its imperialist northern neighbor, even while the state which the bourgeoisie set up crushed the very forces that had done most of the fighting, the popular armies of Emiliano Zapata and Pancho Villa. The PRI's rule was consolidated in the social tumult of the 1930s, which finally allowed the nationalist goals of the Mexican bourgeoisie to be realized. Under Cárdenas, the railroads and oil industry, previously controlled from abroad, were nationalized, a massive land reform program was finally implemented, and the trade unions and other popular organizations were brought into the ruling party. Thus, the PRI maintained a popular base and a nationalist stance. Over the years, the PRI had been able to adapt according to political exigencies, maintaining the facade of a democracy, allowing and sometimes even encouraging a weak political opposition, along with a formally free political press that was even subsidized by the government. But behind the scenes, it ruled through bribes and death squads.

But much of what was left of its old political capital had been used up in the economic crisis of the 1980s, when it was forced to jettison its nationalist pretensions and impose harsh conditions on the population, clearly in the interests of foreign capital. By 1988, the PRI had split. It is generally accepted that the new center-left opposition led by Cuauhtémoc Cárdenas, the son of the ex-President, who had been born into the PRI, was able to capture a majority of the vote in the 1988 presidential election. The PRI's Carlos Salinas was able to win the election only by stealing it.

Already, after Salinas was elected, some officials, including Salinas himself, began to speak cautiously of the inherent problems of the almost complete merger of the PRI and the state, and of the need to reform it. And under Salinas, the PRI for the first time respected the electoral results which turned a few governorships over to the right-wing opposition PAN (National Action Party). But resistance to these very limited moves was very fierce inside the PRI.

Last year's election campaign revealed all the signs of the PRI's problems. The year opened with the rebellion in Chiapas carried out by the Zapatistas, a rebellion that had the support of many of the extremely impoverished peasants, who had been pushed off their land by the encroaching ranches and latifundias and terrorized by both private armies and the police. The rebellion remained relatively isolated, and that allowed the government to play for time. But the rebellion gained the sympathy of much of the population, and it became a symbol of ongoing defiance of the government's authority, not to speak of being a threat of continued peasant land takeovers.

A power struggle inside the PRI exploded into the open with two important assassinations. In March, Salinas's designated presidential candidate, Luis Donaldo Colosio, was gunned down a day after he held a secret meeting which apparently had something to do with political reforms. A few months later, the Secretary General of the PRI, José Francisco Ruiz Massieu, was gunned down. At the time, Ruiz Massieu was negotiating political reform with the opposition. His brother, an attorney general, handled the official investigation; in a news conference he accused high officials of the PRI of the assassination and then promptly resigned. These assassinations led the country's financial newspaper, El Financiero, to call Mexico's political situation, the "Colombianization of Mexico", that is, its takeover by drugs and political gangs.

In the elections of August 1994, the PRI's second presidential candidate, Ernesto Zedillo Ponce de Leon, won relatively easily and the PRI's domination of both houses of Congress widened. But, this only managed to paper over the ongoing political crisis. Clearly, there was a large reservoir of discontent with an electoral system that was run by and for the PRI. But during the election, there were all the underlying threats that if the PRI were voted out of power, political and economic chaos would follow. The PRI stood for continuity and prosperity that, it promised was right around the corner.

Besides that, there was little leftist opposition. The newly formed PRD (Party of the Democratic Revolution), led by Cárdenas, is the main center-left party. But Cárdenas's support had eroded. First, many of the threats by the PRI of chaos were aimed at him. But besides that, Cárdenas endorsed the PRI's main policies of market reforms and NAFTA. And Cárdenas's image as the man of integrity was tarnished when he was accused by one of the other presidential candidates of being just as much of a dictator as all the others when he served as the PRI governor of Michoacán.

In fact, the angrier opposition was expressed from the PRI's right-wing opposition, the PAN's candidate Diego Fernández de Cevallos, who proclaimed, "A country where 40 million people live in poverty, while 40 families control more than half the wealth simply cannot endure." In the one televised debate in May, Fernández gained popularity by tearing into the PRI and PRD. After the debate Fernández's opinion polls shot up, and so he promptly... stopped almost all personal campaigning, obviously out of fear for his life. Fernández was still able to capture over 26 per cent of the vote.

After the elections, the PRI remained solidly in place, leaving the task of modernizing the ossified governmental structure to the future.But with a brand new economic crisis, the future just arrived faster than anyone could imagine. The Mexican bourgeoisie and, standing behind it, U.S. imperialism, have to be aware that with an economic crisis added to political paralysis, many of the ingredients for a social explosion are already in place. The revolt in Chiapas could be a harbinger of things to come, in the countryside and the cities.

Obviously, the bourgeoisie's fear of this explosion is what drove the new President Zedillo to greatly speed up the endless negotiations with the other parties over political reform. In early January, Zedillo announced the formal opening of negotiations with the two main opposition parties, the PRD and the PAN. Zedillo granted these parties some concessions, such as new elections in Chiapas and Tabasco, where the PRD claims the PRI stole the elections and where there are continued confrontations. And he has agreed to stop valuable government support to the PRI, such as free television advertisements, in five future races for governor. In return, Zedillo has made it clear that he expects the opposition to close ranks with the PRI over the economic crisis. Both opposition parties hurriedly signaled that they are ready to do so, proving to the bourgeoisie that they are ready to play the transition game according to the bourgeoisie's rules. For good reason several government officials called this announcement the Mexican equivalent of the Moncloa Pact, the 1977 agreement in Spain among the leftist and rightist parties that brought about a relatively smooth transition from the long-time dictatorship of Francisco Franco to the worm-eaten parliamentary government that exists today.

How this whole business turns out, remains to be seen. Obviously, there are many, many unknowns. However, for the working class and poor – the vast majority of the people – the main problem is not what the parties will negotiate, that is, which politicians will occupy what posts. That boils down only to how the politicians divide up the responsibility for trying to impose the increasingly harsher austerity on the working class and poor.

The problem for the working class is how to defend itself politically against these attacks. They will have to be ready to dump not only the PRI, but the politicians of both the right... and left oppositions.