Issue 10, August 2009
Economic inequality in Mexico harkens back to the colonial era in which Spanish administrators and the Catholic Church enjoyed numerous privileges in what was known as New Spain.
The post-independence period lured other European powers to Mexico in search of many of the trade benefits previously monopolized by Spain. The Mexican government became highly indebted to foreign investors (a trend that would persist over the centuries), and economic disputes led to invasion by the US and Great Britain, and a brief occupation by France.
Economic expansion based on foreign investment and export of raw materials continued under Benito Juarez and Porfirio Diaz in the late 19th Century. By 1900, 90% of all Mexican industry and 25% of all land in Mexico was owned by foreign interests. During the economic growth of the Diaz years, patronage and nepotism increased as new industrial and export wealth became concentrated, in the same way land wealth had previously had been concentrated. Land reforms largely ceased, and peasant populations were left out of Mexico’s development.
Peasant rebellions under Villa in the North and Zapata in the South exacerbated larger land and power struggles between conservative and liberal leaders who deposed and murdered each other with regularity in the years leading up to, and during, the Mexican Revolution. In the aftermath of the Revolution (1910-1920), leaders such as Carranza, Calles, and Cardenas centralized power in Mexico’s first official political party (the PRI), seized private land in the name of the state, and even nationalized foreign oil concessions. Mexico set about industrializing, with the government supporting the development of manufacturing capacity designed to replace imports.
Protectionist trade policies such as subsidies and tariffs were put in place, and the state doled out favors and benefits to select groups.
High oil prices kept Mexico afloat, until the decline in oil prices in the 1970s and 1980s took the Mexican economy down with them. The stock market crashed, the peso lost value, and foreign investment dried up. The Mexican government defaulted on its enormous debt to foreign creditors, and had to be bailed out by new loans from the International Monetary Fund and the US.
This is where the story of Mexico parallels that of other developing countries, as discussed in the Global Poverty and International Development edition of the Monitor. Following these economic crises, Mexico was eligible for US and IMF loans only on the condition that it institute a series of macroeconomic reforms that were called Structural Adjustment Programs (SAPs).
Free market economic growth proved insufficient to support government expenditures, and the country took on more debt. By the 1900s, as Lawrence Wright wrote in his recent New Yorker profile of Mexico’s premier oligarch, Carlos Slim, the government became so overburdened by its loan payments and its difficulty managing the economic transition that it found itself unable to regulate or control the monopolies it had helped create. These monopolies grew, became increasingly inefficient, and crowded out the competitors that the free market was supposed to produce. Fewer competitors meant higher prices for goods and services, and fewer jobs created. The rich got richer and the poor saw few benefits.
Carlos Slim acquired Telmex when it was privatized by the Salinas government in 1990. Now the owner of the sole provider of telephone service, Slim used his connections with Salinas to go on and form America Movil, the country’s only licensed cell phone provider. While telecommunications rates for Mexican consumers rose way out of proportion with other countries, Slim amassed billions of dollars. He now ranks among the three richest men in the world, along with Warren Buffett and Bill Gates.
With the passage of NAFTA in 1994, expectations were raised for broader economic growth. By phasing out trade tariffs, the accord facilitated the movement of low-skill, low-wage US manufacturing jobs to factories known as maquiladoras just inside the Mexican border. Paying Mexican labor less than half the wages and benefits they would have had to pay American workers, US companies exported parts to Mexico for assembly, and then re-exported the finished product back to the US and other markets. However, because only a small part of the total value of the product was added in Mexico, only a small part of the profit remained in Mexico. Wages stayed low, and were ultimately undercut by Chinese workers who would do the same assembly for even less pay in similar factories located in Export Processing Zones (EPZs) in Asia.
The Mexican economy did grow in the wake of NAFTA as trade among the three continental partners exploded. Yet, the growth was not as much as had been expected. The peso crashed again, and the Zedillo government faced severe political threats from assassinations and a peasant uprising by the Zapatista rebels in Chiapas.
See Mexico in the Context of North America section for a thorough analysis of NAFTA.
At the turn of the century, Vicente Fox came to power, ending 70 years of PRI rule. However, economic reforms stalled, due in part to circumstances outside Mexico’s control.
The Mexican economy grew slowly, hindered by the lack of institutions and policies to spur innovation and increase its competitiveness in the global marketplace. With the global recession has come dramatically reduced demand for Mexican products by US consumers and dwindling foreign investment. The top three staples of the Mexican economy – oil revenues, remittances from workers living in the US, and tourism – have all decreased. The Swine Flu scare of spring 2009 made things worse as travel and non-essential business was temporarily restricted.