World Savvy Monitor

Skip to:

• Colonial Times
• Independence and Revolution
• Corporatism
• Transition
• The Post-NAFTA Era
• The 21st Century:  New Corporatism 

Colonial Times

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.  

• In a feudal-type system, land holdings and political power translated into economic power for peninsulares (Spanish-born populations) and criollos (those of Spanish descent born in New Spain).  

• A very distinct class system developed with the Spanish speaking elites and clergy at the top, mestizos (those of mixed race) in the middle, and indigenous populations at the bottom.  

• Elites and clergy either owned the haciendas (plantations) or held government positions; mestizos performed middle-class occupations associated with the haciendas, and indigenous populations were peasant laborers.  For mestizos and Indians, there was little opportunity for advancement.

• Trade was, as in other colonies around the world, highly mercantilistic – raw materials and natural resources were exported and manufactured goods were imported.  

• After independence, these class structures altered only slightly as some Spanish colonial officials returned to Europe, and select criollos and mestizos were able to achieve some social and economic mobility.  Into the vacuum left by the Spanish, however, moved local elites who often fought each other for influence, using peasant populations as pawns in their power struggles.  

• Land reforms often did little more than relegate peasants to communal, subsistence farms in place of large privately-owned haciendas.

Independence and Revolution

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.  

Corporatism

Protectionist trade policies such as subsidies and tariffs were put in place, and the state doled out favors and benefits to select groups. 

• Many peasants, disadvantaged by poorly-conceived land reforms promised to them at the close of the Revolution, migrated to cities. 

• The PRI colluded with business owners and labor leaders to stifle any attempts at collective bargaining among Mexico’s growing ranks of low-end manufacturing workers.  

• Free market competition was undermined by targeted government subsidies, and therefore industries had little incentive to be innovative or efficient.  In the absence of a meritocracy, education held little value and was neglected.  

• The corporatist state lurched along through the mid part of the 20th Century, spending public money on social programs to quell discontent among the poor while taking on more and more foreign debt.  

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.

Transition

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).  

• Mexico was required to take its corrupt and heavily state-influenced economy and rapidly transition it to an open free market system driven by export growth.  

• This meant cutting public spending and jobs, selling state-owned enterprises to private interests, eliminating protectionist subsidies and tariffs, and ramping up industrial capacity to produce goods for export on the global market.  

• SAPs worldwide were almost always associated with short-term hardship as poorly performing domestic industries were put out of business by global competition, jobs were lost, wages fell, prices for basic goods rose as currency lost value, and the public sector (jobs and benefits) shrank.  Like many other countries, Mexico experienced a myriad of hardships while trying to meet SAPs.

• In Mexico, as in other places, it was usually the poor who suffered the most, while the transition provided a window of opportunity for already-privileged elites to use their connections to buy government assets at fire sale prices.  

• From airlines to telecommunications to steel companies, thousands of state-owned assets fell into the hands of a few oligarchs who used their connections to form monopolies. 

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. 

The Post-NAFTA Era

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.

The 21st Century: New Corporatism

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.  

• Chinese competition became more intense after China joined the World Trade Organization in 2000 and came to enjoy better access to world markets for its cheap exports.  

• The burst of the US dot com bubble and the economic decline that accompanied the aftermath of 9/11 reduced demand for Mexican imports in the US.

• The terrorist attacks also distracted the US from efforts to boost economic cooperation with Mexico, and led to bottlenecks at the border amid heightened security.

• Increasing drug violence and political wrangling scared investors away from Mexico.  Immigration to the US (legal and illegal) reached new highs, despite increased border patrols.  

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.

Next:  Inside Mexico:  Economy:
Why Has Mexico Been Unable to Fully Reap the Rewards of Globalization?