Tropic of Chaos (28 page)

This Mexican version of corporatism deepened significantly in the late 1930s under President Lazaro Cárdenas, who accelerated land reform and the nationalization of basic industry. “The assumption underlying Cardenas' policies was that while capitalism was necessary for development, capital, like labor, could be controlled and regulated by the state.”
⁴⁷
Cárdenas “emphasized programs to improve the lot of the lower classes, especially the Indians, through education, redistribution of land, collective farms (
ejidos
), curbs on foreign capital, and a larger role for state-run enterprise.”
⁴⁸

By 1937, Cárdenas had nationalized the railroads and set his sights on the ultimate prize: petroleum. That brought him into direct confrontation with Standard Oil of New Jersey, Shell, and the US government. But Cárdenas prevailed and expropriated the Mexican operations of the international petroleum firms to create the state oil company Petróleos Mexicanos, or Pemex.
⁴⁹

But the system had its problems. By centralizing power and excluding, but not smashing, capital, the Mexican state opened the way for serious corruption. The idea was that the state should be the “rector of the economy.” Business was excluded from politics and denied access to decision-making circles; owners of private businesses were not even allowed to be part of the ruling party.
⁵⁰
Yet, formal exclusion of the private sector from official channels of influence encouraged businessmen to cultivate informal influence and access. Corruption and clientelism resulted.

By the 1960s, some industries had founded autonomous chambers that opposed state involvement in the economy. The most powerful of these were the Businessmen's Council, formed in 1962, and the Businessmen's Coordinating Council, created in 1975. Within these elite factions, pressure for a rightward turn in economic policy would grow.

The corporatist model fell upon hard times during the 1970s. Sagging growth and rising inflation were coupled with increasing public debt. At the same time, an oil boom began to distort the Mexican economy. In 1973, just as new oil reserves came into production, prices surged, going from $3 to $12 per barrel.
⁵¹

At the same time, social pressure was growing throughout Mexico: farmers, workers, and, most of all, students and urban youth were forming active social movements. Their protests were met with arrest, torture, murder, and even massacre. Ten days before the 1968 Summer Olympics opened in Mexico City, soldiers opened fire on a student protest at La Plaza de las Tres Culturas at Tlatelolco. Some two to three hundred were killed, hundreds more wounded, hundreds arrested and beaten, with scores of bodies taken away and hidden by troops.
⁵²

Amidst the rising tension, Luis Echeverría began his six-year term as president in 1970. Personally implicated in the slaughter of protesting students at Tlatelolco in 1968, President Echeverría attempted to shore up the state's legitimacy with a neopopulist program of political and social reforms. “Shared development” was the catch phrase; a massive expansion in public spending, the means. Among other things, the number of university students increased by 290 percent between 1970 and 1976.

The stimulus was paid for with oil income, which was rising as international petroleum prices spiraled upward. But Echeverría needed more revenue. He needed to collect more taxes from the rich but could not because too many were hiding their wealth abroad. So, the government increased borrowing on foreign markets.
⁵³
Under Echeverría, foreign debt shot from $3.2 billion to $16 billion. With the stimulus came inflation. In
August 1976, Echeverría's debt bubble burst, and the peso was devalued 45 percent. Mexico had been a low-inflation country, but in the early 1970s, prices began to rise from an annual average increase of 3.6 percent between 1965 and 1970, to 30.5 percent between 1977 and 1982. By the mid-1980s inflation averaged 90 percent.

The next president, José Lopez Portillo, continued the balancing act: he repressed the radical Left but allowed the Communist Party to run in elections. He spent lavishly on development projects and invested in neglected sectors like agriculture, housing, health, and education. Again, oil prices were surging. Between 1979 and 1980, Mexican oil income grew by almost two-thirds.
⁵⁴
Yet, the government still had to borrow to pay its bills. The economy was growing by 8 percent per year, many companies were operating at full capacity, and Mexico's small stock market was booming. From the early 1960s through the 1970s the number of primary schools doubled, and the illiteracy rate fell to 15 percent; the infant mortality rate fell by half, thanks to a nearly tenfold increase in the number of public doctors.
⁵⁵

In theory, the strategy of taking loans against future oil incomes was sound. As international oil prices increased, so too did the value of Mexico's untapped petroleum. Mexican planners sought to avoid the “resource curse” of developing into an unbalanced, petroleum-fixated economy. Mexico's leading politicians wagered that while credit was cheap and oil income high, they could renovate the nonoil sectors of the economy with petroleum-collateralized debt. Because of the oil boom, credit was cheap: financial markets were awash in liquidity because most petrostates lacked the capacity to invest their windfall earnings internally. These so-called petrodollars were recycled through international financial markets. Diversified and balanced economic growth would allow Mexico to generate tax revenue with which to repay the loans. With this strategy, Mexican technocrats sought to avoid the “mistakes of Venezuela,” which had spent most of the century exporting oil and squandering the income. The trick was to
invest
the petroleum-collateralized income in production, not just
spend
the money on imports.
⁵⁶

Alas, imports did not decline, and domestic production did not surge. The peso's value rose, making imports cheap: grain imports doubled between 1979 and 1980; the oil and service sectors drew away talent. Agriculture, the heart of Mexican society, stagnated amidst the boom, as did other nonoil sectors. Poverty remained severe and widespread. By the end of 1980, Mexico owed $33 billion to foreign banks. As crisis loomed, President José Lopez Portillo insisted, “Our economy is not petrolized.” In fact, it was: nearly 75 percent of Mexico's export earnings came from petroleum.
⁵⁷

The Mexican economy was now like a waiter rushing forward with a tray full of dishes: keep moving and you are okay. But, as the bankers say, “It's not speed that kills; it's the sudden stop.”

The sudden stop took the form of that disciplinary recession unleashed in 1979 when the US Federal Reserve, under Paul Volcker, jacked up rates. This triggered (but did not cause) the Latin American debt crisis. As the crisis worsened, the International Monetary Fund (IMF) and World Bank stepped in. As chapter 13 on Brazil explains, assistance from the Bretton Woods institutions came with strings attached: emergency loans were given only if austerity was imposed and exports increased. But increased exports meant an oversupply of primary commodities and therefore declining prices. Thus, the debt crisis begat the commodity crisis, a prolonged period of low prices for primary commodities such as timber; metal ores like iron, bauxite, and tin; grains and foods like sugar, coca, coffee; and, to some extent, oil. By one estimate, commodity prices declined 35 percent during the 1980s.
⁵⁸
As a result, many economies in the Global South—the ones now feeling the first effects of climate change—suffered relative stagnation for nearly two decades. Only the overflow of the long Chinese boom and the early impact of climate change finally broke the torpor beginning around 2004 and accelerated to the food crises of 2008 and 2010.
⁵⁹

The commodity crisis essentially had three causes: (1) the economic slowdown in the developed countries; (2) the rise of synthetic subsidies in
part as a result of the oil-price hikes of the 1970s, which raised incentives for new industrial engineering techniques; and (3) the structural-adjustment policies of the IMF and World Bank that forced debtor nations to increase exports and devalue their currencies.
⁶⁰

In the summer of 1981, as the effect of Volcker's monetarist squeeze went international, oil prices began to slide, and Mexico faced badly diminished revenues and the world's largest foreign debt: $70 billion. Mexican economists had projected the country would have oil revenues of $20 billion in 1981 and $27 billion in 1982. Both borrowing and domestic spending were based on those figures. In 1981, however, oil brought in a mere $14 billion, and the next year was also below target.
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The cost of debt servicing now consumed most of Mexico's projected petroleum sales, thus most of its foreign earnings.
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By the summer of 1982, Mexico owed almost $81 billion to foreign banks, and that sum was growing. To avoid default, the peso was devalued, and the government imposed limited capital controls. It was the second devaluation of the year.
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Rich individuals and private firms began to panic and shift their wealth out of the country.

On August 12, 1982, Mexico announced that it could not pay its bills and took the first steps toward default, declaring a ninety-day moratorium on repayment. The peso was devalued 30 percent and before year's end would drop another 53 percent.
⁶⁴
As the
New York Times
explained, “A default by Mexico could have serious effects on the American banking system and on banks throughout the world. According to one American banker, some United States banks have as much as 90 percent of their capital on loan to Mexico. Even at banks with relatively small exposure, the Mexican loans represent 30 percent of their capital.”
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In early September, President José Lopez Portillo nationalized the country's private banking system, freezing negotiations with the IMF.
⁶⁶

The eventual compromise involved the US Federal Reserve, the IMF, and most of the 800 banks to which Mexico owed money.
⁶⁷
In exchange for $12 billion in credit, Mexico began economic liberalization and imposed
austerity. Out went Keynes; in came Hayek. The government sold 106 state-owned companies and agencies. These included sugar mills, shipyards, textile and power plants, as well as the parastatal processing plants and the export-marketing firm Ocean Garden Products, to which the unemployed fisherman José Ramírez would have sold his catch.
⁶⁸

Privatization brought new owners who broke unions, fired workers, and drove down wages. By decade's end, 1,155 state businesses had shrunk to only 400. The government earned less than $2 billion from these privatizations, which went to service debts.
⁶⁹
At the same time, food subsidies were slashed; those for eggs, milk, cooking oil, sugar, beans, and rice were eliminated completely. The retail price of gasoline and natural gas doubled.
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By 1986, the purchasing power of the average Mexican was about half of what it had been in 1982.
⁷¹

President José Lopez Portillo, however, retired to a $30 million mountaintop mansion, a monument to venality and arrogance that included a walk-in “refrigerator for furs,” a library with space for a million volumes, and “an astronomical observatory that is better equipped than National University's.”
⁷²

Mexico's trial by debt began the long march to the North American Free Trade Agreement. The agreement culminated a process of liberalization born of the 1982 debt crisis. Along the way, Article 27 of the 1917 constitution was eviscerated; among other things, it now allows greater foreign investment. On January 1, 1994, NAFTA took effect.
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At the same time, in the southern Mexican state of Chiapas, the Zapatista National Liberation Army, a group of mostly indigenous peasants, rose up against the government, calling NAFTA a death sentence for Indians.
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According to its main booster, former Mexican president Carlos Salinas, NAFTA would empower Mexico “to export goods, not people.”
⁷⁵
The rural economy would be modernized, and farmers who could not adapt would find work in the expanding industrial and service sectors.
⁷⁶
But what did free trade really do for Mexico? An almost quizzical article published in
the
New York Times
in 2009 answered this as follows: “In some cases, NAFTA produced results that were exactly the opposite of what was promised. For instance, domestic industries were dismantled as multinationals imported parts from their own suppliers. Local farmers were priced out of the market by food imported tariff-free. Many Mexican farmers simply abandoned their land and headed north.”
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The piece went on to note that, although the value of Mexico's exports had quintupled in fifteen years, almost half a million people each year were outmigrating in search of work, a disproportionate number of them from the countryside. With only one-quarter of Mexico's total population, the countryside accounts for 44 percent of all Mexican immigrants moving to the United States.
⁷⁸

Under NAFTA, the government dismantled most of the agencies that offered assistance and administered subsidies to small farmers. “Lending by both government and private-sector rural credit programs declined 75% after 1994, when NAFTA took effect, while rural bankruptcies increased six-fold.”
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The reformed Article 27 now allows sale of
ejido
lands, which has increased landlessness.
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According to a 2010 report by Oxfam, Mexico has spent $80 billion on food imports and now has a deficit in food trade of $435 million.
⁸¹
Mexican agricultural production has turned away from food for people and internal markets toward animal feed for export.
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Markets for corn, the staple food, protected by government policy until NAFTA, have been completely opened.
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Peasant organizations have demanded a renegotiation of the treaty.
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