Economic history of Mexico

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[edit] Pre-Spanish age

[edit] Spanish age

Economic history of Spain

[edit] Independence

The Mexican War of Independence (1810-21) left a legacy of economic stagnation that persisted until the 1870s. The silver-mining sector of the economy (Mexico's primary earner of foreign capital) was located in the areas of the country that saw the most intensive fighting during the war, resulting in long-term devastation to the mining economy that was only repaired slowly and with great difficulty over the course of the nineteenth century.

Political instability led to weak economic performance in the early years of the Mexican Republic. Foreign investors, based primarily in Spain, France, and Great Britain, were impatient to recoup their resulting losses, while at the same time the absolutist governments of Spain and France had political reasons to oppose Mexico's independence. Both countries attempted repeated invasions in Mexico in the 1820s, using lost investments as the rationale for war. Though Mexico fought off these invasions at great cost, a great deal of available capital left with its Spanish owners in the anti-Spanish backlash that followed, and Mexico subsequently became known as a poor target for foreign investment. Embargoes of Mexican products in Europe further depressed the possibility of developing an export sector in the economy

Mexico's loss of Texas to settlers from the southern United States in 1836-1839, and the invasion and conquest of northern Mexico by the United States in the Mexican-American War of 1846-1848, compounded these difficulties by creating powerful public opposition to U.S. investment in key Mexican industries.

Faced with political disruptions, civil wars, unstable currency, and the constant threat of banditry in the countryside, most wealthy Mexicans invested their assets the only stable productive enterprises that remained viable: large agricultural estates. Later generations accused these entrepreneurs of preferring the symbolic wealth of tangible, secure, and unproductive property to the riskier and more difficult but innovative and potentially more profitable work of investing in industry, but the fact is that agriculture was the only marginally safe investment in times of such uncertainty.

The seeds of economic modernization were laid under the restored Republic (1867-76). President Benito Juárez (1857-72) sought to attract foreign capital to finance Mexico's economic modernization. His government revised the tax and tariff structure to revitalize the mining industry, and it improved the transportation and communications infrastructure to allow fuller exploitation of the country's natural resources. The government let contracts for construction of a new rail line northward to the United States, and in 1873 it finally completed the commercially vital Mexico City-Veracruz railroad, begun in 1837 but disrupted by civil war and the French invasion from 1850 to 1868. Protected by high tariffs, Mexico's textile industry doubled its production of processed items between 1854 and 1877. Overall, manufacturing grew, though only modestly.

During the Porfiriato (1876-1910), Mexico underwent rapid but highly unequal growth. The economic advisors of President Porfirio Diaz reversed the country's decades-long opposition to foreign investment, and by playing off British, French, and U.S. investors and governments against one another, was able to maintain a modicum of national independence. Taking "order and progress" as its watchwords, the Porfirian dictatorship established political stability and at least an image of social peace and the rule of law. The apparent stability of the Porfiriato brought increased capital investment to finance national development and modernization. Rural banditry was suppressed, at least relative to earlier decades; local customs duties that had hindered domestic trade were abolished; foreign investment in mining boomed; and communications and transportation facilities were modernized as the Mexican railroad system, now owned almost exclusively by foreign investors, expanded from 1,000 kilometers to 19,000 kilometers of track between 1876 and 1910.

The economic growth of the Porfirian era was heavily concentrated in the north of the country--the region with the greatest concentration of mineral resources and, coincidentally, the region closest to the recently acquired Southwestern states of the United States. U.S. entrepreneurs invested heavily in mining, mineral refining operations, and the railroad system that connected northern Mexico with the U.S. As the railroad system improved, and as the population grew in the western U.S., long-distance commercial agriculture became viable, and both U.S. and Mexican entrepreneurs began investing heavily in modernized large-scale agricultural estates along the railroad lines of the north.

The technocratic economic advisors of the Porfirio Diaz dictatorship, as well as the foreign investors they invited into the country, were quite satisfied with the advances that the Mexican economy made between 1876 and 1910. Under the surface, however, popular discontent was reaching the boiling point. The economic-political elite scarcely noticed the country's widespread dissatisfaction with the political stagnation of the Porfiriato, the increased demands for worker productivity during a time of stagnating or decreasing wages and deteriorating work conditions, the cruel repression of worker's unions by the police and army, and the highly unequal distribution of wealth. When a political opposition to the Porfirian dictatorship developed in 1910, it quickly gave way to a popular insurrection against the economic foundations of the country's entrenched inequality.

[edit] 1910 - 1929

[edit] The Great Depression

The Great Depression brought Mexico a sharp drop in national income and internal demand after 1929, challenging the country's ability to fulfill its constitutional mandate to promote social equity. Still, Mexico did not feel the effects of the Great Depression as directly as some other countries did.

In the early 1930s, manufacturing and other sectors serving the domestic economy began a slow recovery. The upturn was facilitated by several key structural reforms, notably the railroad nationalization of 1929 and 1930, the nationalization of the petroleum industry in 1938, and the acceleration of land reform, first under President Emilio Portes Gil (1928-30) and then under President Lázaro Cárdenas (1934-40) in the late 1930s. To foster industrial expansion, the administration of Manuel Ávila Camacho (1940-46) in 1941 reorganized the National Finance Bank (Nacional Financiera--Nafinsa), which had originally been created in 1934 as an investment bank.

During the 1930s, agricultural production also rose steadily, and urban employment expanded in response to rising domestic demand. The government offered tax incentives for production directed toward the home market. Import-substitution industrialization began to make a slow advance during the 1930s, although it was not yet official government policy.

[edit] The Mexican Miracle

Mexico's inward-looking development strategy produced sustained economic growth of 3 to 4 percent and modest 3 percent inflation annually from the 1940s until the 1970s. This growth was sustained by the government's increasing commitment to primary education for the general population from the late 1920s through the 1940s. The enrollment rates of the country's youth increased threefold during this period ^[1]; consequently when this generation was employed by the 1940s their economic output was more productive. Additionally, the government fostered the development of consumer goods industries directed toward domestic markets by imposing high protective tariffs and other barriers to imports. The share of imports subject to licensing requirements rose from 28 percent in 1956 to an average of more than 60 percent during the 1960s and about 70 percent in the 1970s. Industry accounted for 22 percent of total output in 1950, 24 percent in 1960, and 29 percent in 1970. The share of total output arising from agriculture and other primary activities declined during the same period, while services stayed constant. The government promoted industrial expansion through public investment in agricultural, energy, and transportation infrastructure. Cities grew rapidly during these years, reflecting the shift of employment from agriculture to industry and services. The urban population increased at a high rate after 1940 (see Urban Society, ch. 2). Growth of the urban labor force exceeded even the growth rate of industrial employment, with surplus workers taking low-paying service jobs.

In the years following World War II, President Miguel Alemán Valdés's (1946-52) full-scale import-substitution program stimulated output by boosting internal demand. The government raised import controls on consumer goods but relaxed them on capital goods, which it purchased with international reserves accumulated during the war. The government it spent heavily on infrastructure. By 1950 Mexico's road network had expanded to 21,000 kilometers, of which some 13,600 were paved.

Mexico's strong economic performance continued into the 1960s, when GDP growth averaged about 7 percent overall and about 3 percent per capita. Consumer price inflation averaged only 3 percent annually. Manufacturing remained the country's dominant growth sector, expanding 7 percent annually and attracting considerable foreign investment. Mining grew at an annual rate of nearly 4 percent, trade at 6 percent, and agriculture at 3 percent. By 1970 Mexico had diversified its export base and become largely self-sufficient in food crops, steel, and most consumer goods. Although its imports remained high, most were capital goods used to expand domestic production.

[edit] Deterioration in the 1970s

Although the Mexican economy maintained its rapid growth during most of the 1970s, it was progressively undermined by fiscal mismanagement and by a poor export industrial sector and a resulting sharp deterioration of the investment climate. The GDP grew more than 6 percent annually during the administration of President Luis Echeverría Álvarez (1970-76), and at about a 6 percent rate during that of his successor, José López Portillo y Pacheco (1976-82). But economic activity fluctuated wildly during the decade, with spurts of rapid growth followed by sharp depressions in 1976 and 1982.

Fiscal profligacy combined with the 1973 oil shock to exacerbate inflation and upset the balance of payments. Moreover, President Echeverría's leftist rhetoric and actions--such as abetting illegal land seizures by peasants--eroded investor confidence and alienated the private sector. The balance of payments disequilibrium became unmanageable as capital flight intensified, forcing the government in 1976 to devalue the peso by 58 percent. The action ended Mexico's twenty-year fixed exchange rate.

Although significant oil discoveries in 1976 allowed a temporary recovery, the windfall from petroleum sales also allowed continuation of Echeverría's destructive fiscal policies. In the mid-1970s, Mexico went from being a net importer of oil and petroleum products to a significant exporter. Oil and petrochemicals became the economy's most dynamic growth sector. Rising oil income allowed the government to continue its expansionary fiscal policy, partially financed by higher foreign borrowing. Between 1978 and 1981, the economy grew more than 8 percent annually, as the government spent heavily on energy, transportation, and basic industries. Manufacturing output expanded modestly during these years, growing by 8.2 percent in 1978, 9.3 percent in 1979, and 8.2 percent in 1980.

This renewed growth rested on shaky foundations. Mexico's external indebtedness mounted, and the peso became increasingly overvalued, hurting nonoil exports in the late 1970s and forcing a second peso devaluation in 1980. Production of basic food crops stagnated and the popultaion increase was skyrocketing, forcing Mexico in the early 1980s to become a net importer of foodstuffs. The portion of import categories subject to controls rose from 20 percent of the total in 1977 to 24 percent in 1979. The government raised tariffs concurrently to shield domestic producers from foreign competition, further hampering the modernization and competitiveness of Mexican industry.

[edit] 1982 crisis and recovery

Cover of the Dec 20, 1982 issue of Time showing images related to Mexico's crisis in 1982. The title Mexico's crisis "We Are in an Emergency" illustrates the level of the crisis.

The macroeconomic policies of the 1970s left Mexico's economy highly vulnerable to external conditions. These turned sharply against Mexico in the early 1980s, and caused the worst recession since the 1930s. By mid-1981, Mexico was beset by falling oil prices, higher world interest rates, rising inflation, a chronically overvalued peso, and a deteriorating balance of payments that spurred massive capital flight. This disequilibrium, along with the virtual disappearance of Mexico's international reserves--by the end of 1982 they were insufficient to cover three weeks' imports--forced the government to devalue the peso three times during 1982. The devaluation further fueled inflation and prevented short-term recovery. The devaluations depressed real wages and increased the private sector's burden in servicing its dollar-denominated debt. Interest payments on long-term debt alone were equal to 28 percent of export revenue. Cut off from additional credit, the government declared an involuntary moratorium on debt payments in August 1982, and the following month it announced the nationalization of Mexico's private banking system.

By late 1982, incoming President Miguel de la Madrid had to reduce public spending drastically, stimulate exports, and foster economic growth to balance the national accounts. Recovery was extremely slow to materialize, however. The economy stagnated throughout the 1980s as a result of continuing negative terms of trade, high domestic interest rates, and scarce credit. Widespread fears that the government might fail to achieve fiscal balance and have to expand the money supply and raise taxes deterred private investment and encouraged massive capital flight that further increased inflationary pressures. The resulting reduction in domestic savings impeded growth, as did the government's rapid and drastic reductions in public investment and its raising of real domestic interest rates to deter capital flight.

Mexico's GDP grew at an average rate of just 0.1 percent per year between 1983 and 1988, while inflation stayed extremely high. Public consumption grew at an average annual rate of less than 2 percent, and private consumption not at all. Total investment fell at an average annual rate of 4 percent and public investment at an 11 percent pace. Throughout the 1980s, the productive sectors of the economy contributed a decreasing share to GDP, while the services sectors expanded their share, reflecting the rapid growth of the informal economy and the change from good emplois to bad ones (services jobs). De la Madrid's stabilization strategy imposed high social costs: real disposable income per capita fell 5 percent each year between 1983 and 1988. High levels of unemployment and underemployment, especially in rural areas, stimulated migration to Mexico City and to the United States.

By 1988 inflation was at last under control, fiscal and monetary discipline attained, relative price adjustment achieved, structural reform in trade and public-sector management underway, and the preconditions for recovery in place. But these positive developments were inadequate to attract foreign investment and return capital in sufficient quantities for sustained recovery. A shift in development strategy became necessary, predicated on the need to generate a net capital inflow.

In April 1989, President Carlos Salinas de Gortari announced his government's national development plan for 1989-94, which called for annual GDP growth of 6 percent and an inflation rate similar to those of Mexico's main trading partners. Salinas planned to achieve this sustained growth by boosting the investment share of GDP and by encouraging private investment through denationalization of state enterprises and deregulation of the economy. His first priority was to reduce Mexico's external debt; in mid-1989 the government reached agreement with its commercial bank creditors to reduce its medium- and long-term debt. The following year, Salinas took his next step toward higher capital inflows by lowering domestic borrowing costs, reprivatizing the banking system, and broaching the idea of a free-trade agreement with the United States. These announcements were soon followed by increased levels of capital repatriation and foreign investment.

Due to the financial crisis that took place in 1981, the total public investment on infrastructure plummeted from 12.5% of GDP to 3.5% in 1989. After rising impressively during the early years of Salinas' presidency, the growth rate of real GDP began to slow during the early 1990s. During 1993 the economy grew by a negligible amount, but growth rebounded to almost 4 percent during 1994, as fiscal and monetary policy were relaxed and foreign investment was bolstered by United States ratification of the North American Free Trade Agreement (NAFTA). In 1994 the commerce and services sectors accounted for 22 percent of Mexico's total GDP. Manufacturing followed at 20 percent; transport and communications at 10 percent; agriculture, forestry, and fishing at 8 percent; construction at 5 percent; mining at 2 percent; and electricity, gas, and water at 2 percent (services 80%, industry and mining 12%, agriculture 8%) (see fig. 9). Some two-thirds of GDP in 1994 (67 percent) was spent on private consumption, 11 percent on public consumption, and 22 percent on fixed investment. During 1994 private consumption rose by 4 percent, public consumption by 2 percent, public investment by 9 percent, and private investment by 8 percent.

[edit] 1994 crisis and recovery

The collapse of the new peso in December 1994 and the ensuing economic crisis caused the economy to contract by an estimated 7 percent during 1995. Investment and consumption both fell sharply, the latter by some 10 percent. Agriculture, livestock, and fishing contracted by 4 percent; mining by 1 percent; manufacturing by 6 percent; construction by 22 percent; and transport, storage, and communications by 2 percent. The only sector to register positive growth was utilities, which expanded by 3 percent.

By 1996 Mexican government and independent analysts saw signs that the country had begun to emerge from its economic recession. The economy contracted by a modest 1 percent during the first quarter of 1996. The Mexican government reported strong growth of 7 percent for the second quarter, and the Union Bank of Switzerland forecast economic growth of 4 percent for all of 1996.

[edit] 1997-present

[edit] References

The following text needs to be harmonized with text in the article Economy of Mexico. (See e.g. Wikipedia:Summary style.)