About Face

September 25, 2007

Mexico’s impending entry into the North American free trade area bodes ill for most of its people. In spite of cheaper consumer goods and more jobs in export industries, it will generate greater insecurity and poverty. An enormous number of workers will be displaced from traditional agricultural activities and basic consumer goods industries.[1] The public sector will be less capable of insulating the majority from the impact of recession and price fluctuations abroad. And the government will be constrained from intervening to protect those who get hurt by the unbridled pursuit of profit.

The agreement for a NAFTA presages a substantial increase in foreign investment in Mexico and a consequent intensification of the export of manufactured and high-value agricultural products to the United States and Canada. The accord promises to allow foreign investors to meld the two prongs of Mexico's development policy -- the maquila and the export promotion program -- to take advantage of Mexico's low wage rates and congenial regulatory atmosphere.

Policy makers argue these changes are healthy because they will make a greater range of consumer goods available more economically. They acknowledge that unemployment will grow, at least in the short run, because the jobs created in export industries cannot keep pace with the jobs eliminated by cheap imports. They are sanguine, however, that in the long run the Mexican economy will be in a better position to pull the country out from under-development.

I disagree. Even as Mexico becomes a full and celebrated member of the world capitalist marketplace, the transformation of Mexico's productive structure is rendering the country incapable of providing for the basic needs of its people, while depriving them of the ability to provide for themselves. This is not inevitable: Mexico could continue to export labor-intensive agricultural and manufactured products while also providing for the basic needs of its people. Such a course would require adopting measures parallel to the present approach, to rebuild the internal market and mobilize the latent productive potential of Mexico's traditional economy. Rather than doing so, Mexico's integration into the world market is systematically closing off opportunities, excluding people, and polarizing society, while it offers opportunities for enrichment (licit and not) to a privileged few.

The free trade pact should be viewed as part and parcel -- and a logical extension -- of the development strategy adopted in the wake of the economic crisis which began in 1976 and swamped the country six years later. Under presidents de la Madrid (1982-1988) and Salinas (1988-present), the trade opening has advanced rapidly: tariffs have been dramatically and unilaterally lowered, import licensing and permits dismantled, the parastate sector privatized and foreign investment restrictions removed -- the effects of which will be accelerated by a free trade accord.

The new Mexico is firmly anchored in the half-truths that describe the ills of the old society. We are told that government excesses brought the nation to its knees; inefficient enterprises, bloated bureaucracies, and outmoded regulations were the cause of the nation's problems. A conservative peasantry and an inefficient industrial structure were the result of paternalistic policies and corrupt politicians.

In fact, the crisis is the product of more than 35 years of successful capitalist development. Between 1930 and 1976, Mexico was transformed from a stagnant and contentious rural society into a complex and dynamic urban-dominated world. The massive distribution of land thrust the country toward food self-sufficiency and enabled the rural economy to finance a lengthy process of industrialization via import substitution. The whole panoply of light consumer goods demanded by a wealthy elite gradually came to be produced in Mexico by transnational firms in partnership with local business.[2] The middle classes burgeoned; organized industrial labor, professionals, and the state bureaucracy further stimulated the industrialization effort with their own demands for durable consumer goods, urban housing and automobiles.

The transformation of rural Mexico is a story of modernization with mass participation. The implementation of the agrarian reform during the Cárdenas years (1934-1940), combined with an ambitious program of irrigation, freed small farmers to raise food production; .basic food production grew at almost 6% a year from 1940 to 1965.[3] B y the early 1960s, the president could boast that Mexico had become self- sufficient in basic food crops, supplying a rapidly growing, predominantly urban population with important improvements in nutritional levels. This was a remarkable achievement, a testimony to the potential of peasant farmers.[4]

But basic food crops were not the only seeds being planted. A 3.4% annual increase in irrigated area between 1940 and 1960 made the deserts and the best rain-fed lands bloom. Feed crops (sorghum and soya) to supply new factory-style production systems for poultry and hogs rapidly displaced staple food crops in some of the most productive regions; sorghum production increased by more than 13% a year from 1960 to 1975, while domestic meat availability increased by more than 5% a year from 1960 to 1980.[5] Sugarcane, fruits, vegetables and industrial crops like cotton also expanded, especially in the newly irrigated districts. Foreign investors spurred this growth, extending contract farming and raising demand for livestock, as well as building, packing and processing facilities.[6]

Industrialization was the main thrust of government policy during those heady years. Output grew at 6.6%, 7.1%, and 7.9% annually during each of the three decades from 1940 to 1970 .[7] There was ample margin for import substitution in non-durable consumer goods industries in the first stage (1945-1960); household appliances and other consumer durables became important during the next decade. In 1962 the automobile was selected to become the backbone for future development, expected to spur many supplying industries (steel, glass, rubber) and infrastructure while promoting new technologies. Planners hoped that by the mid-1970s more than three quarters of the value of new cars would be produced in the country.[8] Plants were built to supply intermediate products for consumer goods, such as chemicals, electrical and non-electrical machinery, synthetic fibers and mineral products.

Mexico seemed to have become a stellar example of balanced capitalist development, with a partnership between national and foreign capital forging a modern nation capable of shedding its cloak of backwardness.[9] The rich prospered as never before, real wages for urban workers increased continually, and rising agricultural productivity and stable prices for basic foods improved the living standard of farmers and their hired hands. Government programs assured a steady expansion in education and health care.

All was not rosy. The accelerated development of the Mexican economy set the stage for a new and more terrible social polarization of the country, the loss of food self-sufficiency, and ecological crisis.[10] In spite of its successes, the economic strategy was based on several fundamental, but erroneous assumptions about the nature of the development process. First, the new productive structure was oriented toward supplying those commodities consumed by a small group of wealthy people at the time these policies were formulated. Second, policymakers assumed that, once given control of some land, peasants would become acquiescent producers of the nation's food supply, rather than rational small-scale farmers requiring capital and new technology. Third, policy-makers blithely assumed that the many basic goods and services industries requiring large or risky investments -- which the state itself undertook -- would eventually become competitive in international markets. Finally, despite the onerous cost, foreign capital and transnational firms were accepted as essential ingredients in the development process.

Although the industrialization program created many new jobs, the informal sector burgeoned as the cities proved unable to absorb the migrants expelled from the countryside. Peasants ceased producing food for the urban markets when official price supports made such efforts unprofitable. Rather than inducing efficiency, industrial policies offered generous bailouts to industry. Powerful economic groups chose to license foreign technology or invite foreign capital to Mexico as partners rather than develop their own organizations or technological capacity. Imported technological models and lack of any serious regulation initiated a serious process of environmental deterioration. While the urban labor force grew rapidly and the middle classes virtually exploded, income and wealth became extremely concentrated. Through 1977, the richest fifth of Mexican families controlled more than 55% of the nation's income.[11]

In spite of a nationalistic discourse, much of the country's new productive structure was shaped, if not owned, by transnational firms. Especially disappointing was the automobile program, which proved ineffectual in obliging manufacturers to produce a truly "Mexican" car. New technologies and labor processes increased productivity and profits, but failed to provide employment for the large numbers of new entrants into the labor force. As land distribution programs slowed in the 1970s, production of basic food crops declined. Government incentives stimulated fruit and vegetable output for export. As a consequence, Mexico spent billions of dollars to import foodstuffs that could have been produced domestically.

The end to food self-sufficiency in the late 1960s was testimony to the emerging rural crisis and the polarization of agriculture, while balance of payments deficits evidenced the failure of the industrialization program to build a solid foundation for future growth. Rising govemment budget deficits reflected the unwillingness of the wealthy elite to finance the program of state-led development or to sustain improvements in social services for the poor.

A flood of "petro-dollars" into the international banking system in the early 1970s helped the government secure loans to postpone the day of reckoning. But by 1976, Mexico had reached a watershed. The purchasing power of the minimum wage was almost four times the level prevailing 30 years previous. Educational and medical services were incomparably greater. Labor's share of national income had risen from 25% to 36%. But because of its lack of competitiveness, industry was a growing drain on the country's foreign reserves, requiring ever-greater quantities of costly imported raw materials, intermediate products and capital equipment. At the same time, food imports were absorbing the profits generated by export agriculture.

With the discovery of oil in 1978, Mexico once again was able to postpone the impending crisis. President José López Portillo embarked on a program to "administer prosperity," borrowing tens of millions of dollars for oil drilling, transport, and refining. Complementary investments in steel, cement and construction led to an economic boom and an important expansion of employment. Mexico's small-scale farmers continued to flee the countryside, while imported consumer goods poured into urban shops, financed by the carefree lending policies of the international private banking system.[12]

As in the past, government largess replaced serious attempts to attack the underlying problems of the development strategy. The wealthy continued their assault against the peso by squirreling away billions in bank accounts abroad.[13] By the end of López Portillo's term in 1982, international support was at an all-time low, government finances were in shambles, his economic and social programs were canceled, and the foreign debt reached nearly $100 billion, second only to Brazil's. The unpopular president was forced to devalue the peso and suspend payments on the debt. In one last exercise of power, he nationalized the banking system owned by the wealthy minority he blamed for the nation's woes: not only had it served as conduit for massive capital flight, but it controlled most of the nation's modern industrial strucutre.[14]

The crisis which descended in 1982 threw thousands out of work, drove wages down, and brought on drastic cuts in expenditures for social welfare. But for a privileged group of financial and industrial capitalists and a new generation of policy-makers, the crisis offered new opportunities to reorganize the Mexican economy.

During the course of the next five years, administratve barriers and tariffs were rapidly felled to facilitate production, stimulate exports, and create internal competition. A controversial decision to allow IBM to construct a wholly-owned computer factory set the pattern for future developments. Restrictions on foreign investment were relaxed; the dismemberment of the powerful para-state sector followed.

With minimum wages below those prevailing in the sweat shops of the four "Asian tigers" (Hong Kong, Taiwan, Singapore and South Korea), the maquila industry (in-bond assembly plants) took off and the big three automobile giants decided that Mexico could become a major player. Negotiations with the GATT secretariat were renewed, and in 1986 Mexico formally undertook a commitment to liberalize its trading system, a process which had already begun with the sharp reduction of tariffs and other import barriers.

A cornerstone of the new model is the string of social “pacts” which have dictated the relationship between wages, profits, taxes and prices since November 1987. The pacts slashed real wages, especially at the lower end of the scale, and strengthened the taxation system, reducing some marginal rates and greatly broadening the tax base. Public investment and spending on social services were pared down, as was support for basic grain production, which further eroded the living standards of workers and peasants. The real value of the minimum wage has declined about 60% since 1976, and a significant 10% since the implementation of the pacts four years ago.[15]

The loss of food self-sufficiency, more than a monumental waste of foreign exchange on food imports, is provoking the systematic marginalization of millions of peasant farmers and the erosion of their lands. Grain farmers have been driven to desperation by low domestic prices and massive imports of animal feed and human food, which now account for almost one-half of total consumption. Many farmers now plant only enough for their own consumption. The destruction of the peasantry, which still accounts for one-quarter of the labor force, appears to be one objective of the policy to fix prices low and import substantial quantities of food.

Local consumer goods industries have also been hit hard by the decline in people's real incomes and the import of food, clothing and even household appliances and furniture. Lack of credit has kept such small-scale producers from attempting to modernize in order to compete.

The new model of outward-looking economic development implanted during the past decade represents a significant shift in priorities. In this new world, resources are no longer supposed to be diverted to protect inefficient domestic industries or small-scale rural producers. If they cannot compete, then they must find some new way to survive. The model's success depends on the continued dynamism of the economies of the advanced industrial countries and on a massive inflow of foreign investment to stimulate export production -- none of which can be controlled by the Mexican government. Underlying the new strategy is the same fundamentally flawed assumption that brought down the old one: that benefits will trickle down to the poor, by job-creation and the linkage effects of industrialization.

With 85 million people, Mexico is much larger than the four Asian tigers combined; more of Mexico's people still depend on agriculture than industry. More than a million young people will enter the labor market during each of the next twenty years. In spite of its dramatic growth in recent years, labor-intensive maquila operations employed only 460,000 people at their height (the U.S. recession has already been blamed for tens of thousands of layoffs); export of non-traditional manufactures (automobiles, computers, etc.) employs even fewer. Even if the world economy were to continue to afford spectacular rates of growth in both of these sectors, they cannot guarantee any place for displaced producers and their families.

Environmental costs will rise. Mexico, one of seven countries of "megabiodiversity" in the world (along with Australia, Brazil, Colombia, Indonesia, Madagascar and Zaire), is suffering an environmental crisis that extends far beyond the horrors of what is reputedly the most polluted city in the world. The orthodox development schemes being contemplated offer bleak prospects for redressing decades of abuse and neglect. Resources are not available for corrective measures or even for the regulatory structures required to assure that producers adhere to standards already established. With increased competition and a drive for higher productivity, new production processes are further threatening the integrity of many ecosystems and workplaces with toxic discharges, the intensive use of agrochemicals, industrial solvents and other chemicals, and the disregard of health and safety measures for workers. Industrialization supplies the beneficiaries of distorted development with the goods, but neither the producers nor the consumers have found a way to confront effectively the ecological horrors it is creating.

Mexico’s integration into the free trade area appears inevitable. We are told that there is no alternative.[16] This approach is championed by the world's major financial powers and is being implemented throughout Latin America. The leadership claims that without these policies, Mexico will not be able to modernize its productive structure. What it does not say is that with these policies, most Mexicans will become irrelevant.

A different type of strategy could wrest Mexico from the throes of its deepening economic crisis without reversing the move towards international integration. [17] First, raising grain prices substantially would lead to a dramatic increase in basic grain production by mobilizing reserves of under- and unused productive capacity presently available in Mexico. This would immediately revive the rural economy by increasing the incomes of small farmers and rural day laborers.[18] Second, an official decree to double the real minimum wage, restoring the purchasing power of 1980, would raise wages of many workers in the urban economy.[19] Together, these two propositions would create millions of new jobs and redistribute income to stimulate the domestic market and induce a process of demand-driven growth. Due to Mexico's abundant resource endowment, these two policy packages do not require any significant modifications in the export-based agricultural and industrial development and offshore assembly schemes that are the cornerstone package of present policy.

Such an approach would provide a means to correct the root causes of the country's present economic difficulties by inviting the Mexican population to participate, with incentives, in helping alleviate the crisis for their families and for the nation as a whole. Not only would such a strategy create more employment than any other program, but its effects on income distribution would also be highly conducive to further sustainable growth.

This strategy could not magically resolve all of Mexico's development problems at a single blow. But by strengthening the internal market for locally-produced goods, it would be a real beginning. The key is the reincorporation of large numbers of workers and peasants into productive life with adequate incomes to facilitate a collective attack on social problems. In conditions of progressive impoverishment, such a mobilization is inconceivable.

By focusing on food self-sufficiency as the point of departure, the strategy identifies a sector where import substitution would be relatively inexpensive. The increased incomes and higher employment levels generated by such a program would have a dramatic impact: one simulation estimated that absolute poverty would decline by 27% to 30 million people, a reduction of 11 million of those now living below the poverty line! Income linkages within Mexico would spread benefits among all groups. Even the government would be better off: the buget deficit would be 10% less than in 1986 and the trade surplus would be substantially higher, 46.7% above the observed 1986 level.[20]

The "Mexican miracle" that successfully brought millions into the modern era disintegrated into a morass of debt-fueled crisis. After wresting peasants from their traditional forms of social organization and production, the new society was unable to offer them productive jobs; instead they were obliged to congregate in the overcrowded slums or migrate to the United States. When the bubble burst, they could not be sent back home, nor could they continue to be supplied with public services. To make Mexico competitive, the former peasants were then thrust into the comers of Mexican society -- marginalized, as Mexicans express it. The proposed free trade pact promises to make that marginalization permanent.

This is not a plea to protect the "noble savage" or to recreate the cooperative indigenous farming village of yore. The argument stems from the recognition that present development policies will be unable to incorporate the rural population into the productive fold. Rather than toss them off as flotsam, rejecting their humanity and destroying them as the residue of industrial progress, I suggest that they can survive, maybe even flourish, in a world organized by themselves in symbiosis with modernity. At best, existing policies condemn these sizable groups to marginality; at worst, to misery and extinction. But people do not normally accept their damnation passively. Small farmers as a group are too important an actor in Mexico’s history for politicians to simply write them off without considering their reactions and exploring alternatives.

In today’s world of international development pundits, we would make a great stride forward by recognizing that at least part of the solution must come from allowing the majority of those not actually incorporated into the modern world to eke out a living on their own terms rather than subjugating them to a system that finds even their oppression too expensive.

David Barkin teaches at the UAM-Xochimilco in Mexico City, and is director of the Centro de Ecodesarrollo in Morelia. His latest book is Distorted Development: Mexico in the World Economy (Westview, 1991).

This article is based on the analysis presented in my recent book Distorted Development: Mexico in the world economy, (Boulder: Westview, 1990).

[1] Although space does not permit adequate treatment here, the FTA will probably bring a further assault against the environment. It will intensify specialized production in fragile ecosystems, as well as accelerate the deterioration of health and safety conditions in industrial settings. For more details, see David Barkin, "State control of the environment: Politics and degradation in Mexico," Capitalism Nature Socialism, Vol. 2, No. 1, Feb. 1991, pp. 86-108.
[2] The single most comprehensive source on the role of transnational firms in the early industrialization of Mexico is Fernando Fajnzylber and Trinidad Martínez Tarragó, Las empresas transnacionales, (Mexico: Fondo de Cultura Económica, 1976).
[3] Secretaría de Agricultura y Recursos Hidráulicos (SARH) Estadísticas Básicas 1960-1986 para la Planeación del Desarrollo Rural Integral, (Mexico: SARH, 1986); "Consumos Aparentes de Productos Agrícolas, 1925-1982," in Econotécnica Agrícola, Vol 7, No. 9 (Sept. 1983). The first of these is available on diskette from Centro de Ecodesarrollo, Apdo. 33E, 58020 Morelia, Michoacán.
[4] An excellent summary in English of the transformation of Mexican agriculture is Gustavo Esteva (coord.), The struggle for rural Mexico (South Hadley, MA: Bergin and Garvey, 1983). For a discussion of the politics of achieving food self-sufficiency, see David Barkin, "The end to food self-sufficiency," Latin American Perspectives, No. 54 (1987); and David Barkin and Billie DeWalt, "Sorghum and the Mexican food crisis," Latin American Research Review, Vol. 20, No. 3 (pp.30-59). The uniqueness of the Mexican achievement of self-sufficiency is evident in the analysis of the experience of 23 other developing countries in Barkin, Batt and DeWalt, Food crops vs feed crops: The global substitution of grains in production (Boulder, CO: Lynne Rienner Publications, 1990).
[5] SARH, Estadísticas Básicas 1960-1986.
[6] For a discussion of the development of commercial agriculture in Mexico and its relation to the international market see Steven Sanderson, The Transformation of Mexican Agriculture, (Princeton: Princeton University Press, 1988). Our work on hog raising offers a disturbing picture of the way in which factory production has impoverished small farmers and led to very high prices for pork; it also offers a concrete strategy for reversing this trend (Blanca Suárez and David Barkin, Porcicultura, producción de traspatio -- otra alternativa, (Mexico: Centro de Ecodesarrollo, 1990).
[7] Secretaría de Programación y Presupuesto (SPP), Instituto Nacional de Estadística, Geografíae Informática (INEGI), Estadísticas Históricas de México, 2 vols., (Mexico: SPP, INEGI, 1985). This is the single best source of historical statistics on Mexico.
[8] Rhys Jenkins provides a comprehensive evaluation of the automobile strategy for import substitution industrialization in Transnational Corporations and the Latin American Automobile industry, (Boulder: Westview Press, 1986).
[9] Raymond Vernon was an early celebrant of the Mexican development strategy. See his The Dilemma of Mexico's Development, (Cambridge: Harvard University Press, 1963) for a defense of this strategy. Of course, the Mexican academic community was firmly against this type of development, reflecting the dominance of the dependency school and the demand for a more nationalistic development strategy. The Fajnzylber-Martínez book cited above as well as Fajnzylber's later book, La industrialización trunca en América Latina, (Mexico: Nueva Imagen, 1982) reflect some of this thinking, with a technocratic bent. NACLA's many publications on Mexican and Latin American industrialization strategies reflect this approach, as do many writings in Latin American Perspectives.
[10] New technologies led to the salinization of lands, erosion, deforestation, degradation of the quality of underground water supplies, and the poisoning of workers and foods with insecticides.
[11] Of the market economies, Mexico is one with the most unequal distribution of income; the poorest 20% of the population only received 4% of total personal income, even after including the value of their own housing and the food they produced for themselves. See Table 5.1 of my book, Distorted development: Mexico in the world economy. The data is now commonly available in many different sources; see especially, World Bank, World Development Report for 1980.
[12] Consumer goods imports increased 90% faster than all imports during the last 15 years. In the period of rapid opening to the world economy, 1985-1989, they more than tripled in value.
[13] A new nationalism seemed to be the order of the day when the president announced a short-lived policy change in early 1980: 1) to set a ceiling on petroleum exports in spite of U.S. pressures to the contrary; 2) to suspend negotiations for Mexico to join the GATT; and 3) to undertake a massive program to regain food self-sufficiency. A newly assertive internationalized elite, supported by a coterie of neo-liberal "técnicos", took advantage of a precipitous decline in oil prices to reverse this exercise in presidential machismo.
[14] For a revealing discussion of this conflict, see Rolando Cordera and Carlos Tello, México: La disputa para la nación, (Mexico: Siglo XXI, 1983).
[15] Comisión Nacional sobre el Salario Mínimo, internal working documents.
[16] There has been an outpouring of literature on the destructive effects of the crisis, but virtually none on alternative strategies. There have been efforts among unionized and non-union workers, peasants and different groups within the society to organize against the decline in real wages, the cutbacks in public services, and the privatization of basic industries.
[17] I call this the "war economy," derived from the literature on the successful organization of civilians in the U.K. and the United States during World War II to produce food and whatever else in the face of shortages created by the German control of the seas. The British "Victory Gardens" are generally cited as the stellar example of unplanned production in difficult circumstances.
[18] The program need not be as inflationary as it might appear at first. Food grains are not an important part of the total expenditures for most families in Mexico, and thus, even a doubling of prices would only provoke a one-time increase of substantially less than 5% in costs; the program also calls for a food distribution program targeted to the 22% of the population with dire nutritional deficiencies. Similarly, a rise in urban wages for the poorest paid worker could be counterbalanced by increasing productivity. For more details about the impacts of the proposal see the last chapter of my book and the work by Irma Adelman and Edward Taylor, summarized in "Is structural adjustment with a human face possible? Th case of Mexico," Giannini Foundation of Agricultural Economics Working Paper 500, Dept. of Agricultural and Natural Resource Economics, University of California, Berkeley, Feb. 1989.
[19] The increase would have to be regularly revised to preserve the new, higher level. Wages for many organized workers in transnational corporations, and even in some parts of the maquila industry, might not be affected by this proposal since their workers already earn substantially more than twice the minimum wage.
[20] Adelman and Taylor, "Is structural adjustment."

Tags: NAFTA, Mexico, foreign investment, industry, marginalization

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