CHAPTER 22: the BASICS of MEXICAN INDUSTRIALIZATION: 1950-1970 (Written 1996; Revised 2007)

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CHAPTER 22: THE BASICS OF MEXICAN INDUSTRIALIZATION: 1950-1970 (Written 1996; Revised 2007)

The Mexican economy has had faces severe economic problems. At various times, there were 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 sometimes seemed 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".

(1) Some Facts about the Growth Record of Mexico to 1995

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 the range 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 on Page 2, 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 1000 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. High birth rates have meant that the Mexican population is very young and that a large percent of the population are dependents (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 considerably 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).

RATES OF GROWTH

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%

1991 3.6% 2.1% 1.5%

1992 2.6% 2.0% 0.6%

1993 2.2% 2.0% 0.2%

1994 3.5% 1.5% 2.0%

1995 -6.9% 1.5% -8.4%

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

(2) THE MEXICAN DEVELOPMENT STRATEGY UP TO 1970

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 up to 1970. This was the period in which the Mexican economy seemed to be doing well. Later chapters will examine the period from 1970 to the present, a period with considerable economic problems. Of the many aspects of the development strategy, let us focus here on three important ones: trade policies, agriculture, and the role of the government.

(a) 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 consumer goods, Mexican companies needed capital goods (machinery, equipment, and so forth). 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 American dollar. From 1954 to 1976, 12.5 (old) pesos were the equivalent of one American 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 used a large amount of machinery combined with relatively few workers.) However, capital-intensive production did not 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. But until the mid-1970s, the level of Mexico's international borrowing was not so high as to create problems.

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 its perpetuation.

(b) Agriculture

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. As we saw with China, 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 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 1960, the average farm in Mexico 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, and so forth. 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 went 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 set prices to favor production of cattle, tomatoes, strawberries, and so forth 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 poor landless workers. One 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.

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, as mentioned in the previous chapter. This organization provides a form of security. 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 in a later chapter.