Mexico: The Wages of Trade

September 25, 2007

Until its recent embrace of free trade and market-oriented reform, Mexico was a paragon of nationalism and inward-oriented development. The Mexican state created a framework for capitalist development in which the demands of the working class were coopted and controlled, national capital was protected and encouraged, and foreign capital was extensively regulated. From the mid-1950s through 1970, Mexico's development strategy of import-substituting industrialization (ISI) resulted in a robust 9% average annual growth rate, giving rise to the so-called “Mexican miracle.”[1] Sustained growth ensured political stability under the moderately authoritarian rule of the Institutional Revolutionary Party (PRI).

The PRI maintained an equilibrium among competing classes and economic sectors by distributing the rewards of economic expansion among a heterogeneous coalition base .[2] The state restrained societal demands on the political system within limits compatible with the overall growth of the economy. A judicious blend of cooptation, occasional harsh repression, carefully cultivated elite consensus, interlocking pacts and alliances, and a low level of popular mobilization guaranteed the survival of a regime that Mario Vargas Llosa once called “the perfect dictatorship.”[3]

Recently, the “perfect dictatorship” has shown signs of imperfection. In 1988, in a process marred by blatant and widespread fraud, PRI candidate Carlos Salinas de Gortari won—with a slim majority of 50.36% of the official vote—the most competitive presidential election in recent memory. When he took office, Salinas posed a two-pronged modernization program for his six-year term: deep economic reforms and a more open political system. He insisted, however, that economic change must come before democratization. We will “respond to the call of Mexicans for improved well-being,” he said. “It's a matter of the two reforms going at different rhythms, but the priority is economics.”[4]

That priority was present in the administration of Salinas' predecessor, Miguel De la Madrid. Under the two administrations, the role of the state has been redefined to create a framework in which large corporations and transnational capital are the engines of growth. The transformation, boasted an undersecretary of financial affairs a few months ago, “took 10 years of adjustment, 10 years of political corrections, and 10 years of political guts.”[5] Salinas is seeking to build a political system compatible with the neoliberal agenda; he has in mind a leaner more efficient and technocratic form of authoritarian rule. At the same time, he is trying to respond to the polifical crisis of support and legitimation for the PRI manifested in the 1988 elections.

The National Solidarity Program (PRONASOL) has become the centerpiece of that polifical response. While reducing statewelfare spending, Salinas has increasedthe discretionary spending power of the president. Under PRONASOL, ostensibly a program of assistance to the Mexican popular sectors, selected communities are given supplies and equipment for locally initiated development projects. By 1991, this new brand of “liberal populism” accounted for 35% of non-debt government spending. The program serves Salinas' economic agenda by diffusing potential social discontent, centralizing power, and adapting the state's traditional social role to an era of shrinking government.[6]

If PRONASOL is the political response, the North American Free Trade Agreement (NAFTA) has become the centerpiece of the economic response. The NAFTA initiative culminates and consolidates the last decade's deep and accelerated restructuring of the Mexican economy. NAFTA, if ratified, will create strong “conditionality” for Mexican economic and social policies.[7] It will restrict Mexican government policies in areas such as regional and sectoral development, export subsidies, redistributive policies, social welfare, research and development, foreign investment, and energy.[8] NAFTA is intended, in part, to make the neoliberal transformation irreversible and create the stable economic framework required for long-term foreign investment.

Salinas has aggressively pursued deregulation of markets, promoted foreign-capital inflows, sold state enterprises, further liberalized trade, and fought inflation through high real interestrates and fiscal contraction. Privatization, initiated in 1983 by De la Madrid, has accelerated under Salinas. Of 1050 state enterprises in 1983, only 285 were left in 1990.[9] By the end of Salinas' term in 1994, Mexico is not likely to have a significant state-enterprise sector. Recently Salinas has completed the reprivatization of the banks nationalized in 1982.

Mexico, itis argued, must maintain low wages and a flexible workforce if the country is to remain attractive for transnational capital. Recently the government announced plans to change labor laws, with the intent of “rewriting” colective agreements in this direction. [10] Along these lines, the fight against inflation has benefited from price and salary controls agreed to in the Economic Solidarity Pacts (PSEs) with participation of the state-sponsored and controlled, although increasingly feisty, Confederation of Mexican Workers (CTM). The PSEs, renewed periodically under different names, have restrained real wages—making workers the main victims of anti-inflationary policies and continued foreign-debt service. At the time Salinas has continued with the Mexican government’s long-standing practice of thwarting the formation of independent trade unions. As a result, 1992 saw a growing number of unauthroized strikes in the country.[11]

When Salina’ predecessor and mentor, Miguel De la Madrid, took office in 1982, his first priority was to build investor confidence and patch up relations between the private sector and the PRI. Along with restrictive fiscal and monetary policies, he adopted a package backed by the International Monetary Fund (IMF) and the U.S. Treasury to control inflation and set a more realistic exchange rate. Faced with the failure of oil-led development and the need for other sources of foreign-exchange earnings, Mexico began to mend fences with the United States, and became less able to withstand pressures from the IMF, the World Bank and the private commercial banks. These external actors were mainly concerned with guaranteeing continuous service of the foreign debt, both private and public. Trade liberalization was required to boost export-led growth, as well as to reduce inflation by introducing import competition to control prices. A major component of De la Madrid's strategy was to promote the in-bond assembly plants, or maquiladoras, along the U.S.-Mexico border and in Mexico City. Mexico also sought a bilateral agreement with the United States on subsidies and countervailing duties in 1985. The following year, it joined the General Agreement on Tariffs and Trade (GATT).

The new economic strategy has not been able to resolve the contradictions of the old inward-oriented and state-led strategy; nor has it promoted democracy in any meaningful way. On the contrary, inequality and human suffering have intensified. Neoliberal policies have had an onerous social and economic cost. Debt servicing required a real transfer to the North of an average 4,8% of GDP each year between 1983 and 1988.[12] Labor's share of national income declined from 43 to 35% between 1980 and 1987.[13] In 1987 real wages had declined to 56% of their 1980 value. [14] Whereas in 1975 the ratio of U.S. wages to Mexican wages was 4:1, in 1985 it was 10:1.[15] Central government spending on welfare declined from 17 to 13% of the federal budget between 1980 and 1984.[16] According to one estimate, currently half of the Mexican labor force lives below the official poverty line.[17] The distribution of wealth became more skewed as a result of an economic model that favors economic concentration. As one government official put it, “we haven't really sought to stop concentration of wealth. We just wanted to remove the barriers to competition”.[18]

The prospects for shared benefits in the future are dim. Mexican policymakers have consistently claimed that the best way to address inequality is by creating many and more productive jobs through the outward-reorientation of the economy.[19] However, the promise of full employment seems elusive, as unemployment hovers around 20%, and underemployment is at least twice as high.[20] The 80% growth of the informal economy during the 1980s is the best indicator of the inability of the current economic program to provide enough jobs.[21] Through industrial parks, credit, and administrative facilities, the government encourages marginal businesses and informal entrepreneurs to integrate their activities with large transnational corporations, especially through the maquiladora program.[22] This allows large firms to avoid unionization and to pass on to small-and-medium-sized businesses the risks associated with fluctuating demand.

High levels of informal employment and disguised unemployment therefore remain despite the aggressive industrialization drive. Unemployment has been exacerbated by Mexico's rapid population growth during the 1980s over 3.5% of the economically active population annually. [23] Despite job gains in the export-oriented sector, and in particular in the maquiladora industry, liberalization of the Mexican market is hurting domestic industries located in the triangle between Mexico City, Monterrey and Guadalajara. These industries employed 2.5 million workers in the past.[24] Since the maquiladora sector has never employed more than half a million people, the net effect has been a loss of jobs in the industrial economy.[25] The number of jobs in the rural sector will also diminish as a result of land-holding (ejidal) reform, the dismantling of support for agriculture, and freer trade in basic grains—which should deepen under NAFTA.

It is far from certain that real wages will rise significantly even if the new economic strategy is able to create enough jobs. High rates of population growth and unlimited supplies of labor in the countryside create continuous downward pressure on wages. Moreover, the outward orientation creates tremendous urgency to maintain “international competitiveness.” This is achieved mainly by regressive competition with other “cheap-labor havens,” which results in lowered wages, coerced trade unions and lax enforcement of labor and environmental regulations. Further, maquiladora plants are mobile, and can shift to other countries with relative ease. The resulting competition over scarce capital resources with other low-wage countries is unhealthy, producing more pressure to lower costs of production at the expense of workers and the environment. Moreover, there is little evidence of a shift in themaquiladora sector toward high-skill, high-wage jobs.[26]

Finally, it is unclear whether the current economic program will create sustained and broad productivity growth. Mexico must find a way to raise productivity. This requires investment in human capital—education, health and occupational safety, job training, occupational rights—as well as in technology, research and development, and plant, equipment and materials. The new industrialization strategy does not adequately address these requirements.[27] Foreign capital flowing into the maquiladora sector adds new physical plants and equipment, creates jobs, and introduces some technological know-how into the country. However, it seems unlikely that money will be invested in the worker, given the sector's track record in terms of wages, benefits, living conditions, labor turnover, occupational safety, social disruption, and environmental degradation. The pressures on all levels of government for fiscal austerity (that is, to spend less on social programs, health, and education) will only worsen the straits of the Mexican worker. As has happened in Canada, NAFTA will restrict the Mexican government's ability to apply domestic policies that contribute to these objectives.[28]

Privatization was supposed to increase the competitiveness of Mexican exports in the global marketplace. The shift of assets to the private sector, however, has promoted concentration rather than competition. As Mexico scholar Judith Teichman explains: “The purchasers of Mexico's most important parastatals have been Mexico's most powerful economic groups in association with foreign consortia, in the cases of the biggest purechases, such as TELMEX. In some cases the degree of economic concentration is startling: Jorge Larrea, a principal shareholder in nine of Mexico's industrial conglomerates, including two major banks, now controls over 90% of Mexico's copper production through his company, Minera Mexico.”[29]

The outcome is an economy controlled by a select few. Where 25 holding companies produce 47% of the GNP (in the formal economy), free competition is an ideal, not a reality.[30] Also, the privatization process has been marred by accusations of a lack of transparency and irregularities in pricing. It appears that rent-seeking (the quest for windfall gain) has persisted—and in fact become more sophisticated—under economic liberalization.

The old strategy, with its reliance on cheap food pricing policies, was biased against the development of the rural sector. Neoliberal reforms have, if anything, worsened conditions. During the 1980s fiscal support for rural development shrunk from 12% of total public expenditure in 1980 to 7.5% in 1988.[31] During the 1980s the gap between the production and consumption of basic grains widened.[32] Mexico must now import a larger share of the food it requires to feed its growing population. The promotion of agribusiness—a centerpiece of current policies— only increases dependency on external factors and threatens food security if another balance-of-payments crisis hits the country.[33] The government has promoted agribusiness ventures in the northern states, with active support or participation of foreign capital, especially giant U.S. food conglomerates. Small farmers are linking themselves to this export-oriented drive, which has economic, social and environmental perils.

At the economic level, more capital-intensive agribusiness enterprises may require less labor and eliminate jobs. Recent constitutional changes affecting ejido holdings will mean that many small-holding peasants will lose their lands, and that a class of landless rural workers will grow, feeding migration to the cities[34] Trade liberalization in basic grains such as corn and beans, embedded in NAFTA, will further threaten the livelihood of at least two million peasants who still grow the traditional staples.[35] Moreover, the chemical-intensive nature of agribusiness will damage the environment. This massive process of commercialization will upset the natural balance of Mexico’s delicate eco-systems.[36]

The new policies have attracted foreign capital but, perversely, a large part of it has gone into financial speculation through the Mexican stockmarket.[37] Increased foreign ownership will probably result in a greater outflow of profits, interest payments, and royalties. For the moment, incoming capital is contributing to an appreciation of the peso, a fact that plays against Mexican exporters and into the hands of the United States. An overvalued peso serves U.S. economic interests—at least during the NAFTA negotiations and ratification—because it lowers the trade deficit with Mexico and reassures Congress of the benefits of NAFTA. Trade liberalization has promoted a huge increase in imports into Mexico, and the country has recently reached record levels of current-account deficit.[38] The possibility that Mexico could face another loss of faith by foreign investors, a round of capital flight, and a large devaluation that would discredit the government is currently a matter for nervous speculation in Mexico.[39]

Salinas' promise that economic liberalization would promote political opening rings hollow. NAFTA's reliance on unaccountable panels of “experts” to make economic decisions that elected representatives should make, as well as the shift of power to large transnational capital embedded in the agreement, do not contribute to a more democratic and participatory society. The concentration of wealth and market power in the hands of grupos económicos closely linked to foreign capital, on the one hand, and large parts of the population suffering from deprivation and economic insecurity, on the other, do not contribute to democracy either.

People in the North often dismiss criticism of NAFTA as protectionism and nationalism at best, and veiled racism or indifference to less-developed countries in the South at worst. Our purpose has been to make a case against the Mexican neoliberal transformation on social, political and economic grounds. The tone of the article has been critical since we do not believe the Mexican people are well-served by this transformation. That does not mean we oppose economic integration per se.

Our world is shrinking, national borders are becoming ever more porous, and the boundaries between intenational and domestic arenas are becoming blurred. Integration will continue and should be seen as an opportunity for transnational alliances. The choice is between managing economic, social and political integration in the collective interest of a broadly defined political community (as some Europeans are trying to do) or managing it in the interest of a small set of powerful economic forces (as NAFTA does).

Integration can, in principle, be managed in a way that promotes shared and equitable economic growth, preserves and improves the social contract, is based on participatory and accountable democracy, defends the achievements of trade unions, and protects the environment. Building on the proposals of Cuauhtémoc Cárdenas, and the expeience of others, we can imagine a trade and development pact that would make human development the top public-policy priority.[40] We know what such a pact would entail. The challenge is to create the transnational popular alliances that will place such a pact at the center of the political agenda.

ABOUT THE AUTHORS Ricardo Grinspun teaches economics at York University in Toronto. Maxwell Cameron in the School of International Affairs at Carleton University in Ottawa. They are the co-editors of The Political Economy of North American Free Trade which will be published this year by St. Martin’s Press.

NOTES This article draws on an edited volume by Ricardo Grinspun and Maxwell A. Cameron, entitled The Political Economy of North American Free Trade (New York: St. Martin's Press, forthcoming). Funding for this project was provided by the government of Ontario, the Centre for Research on Latin America and the Caribbean (CERLAC) at York University, and research grants for Max Cameron from the Social Sciences and Humanities Research Council of Canada and Carleton University, and for Ricardo Grinspun from York University. The authors are grateful to Kathy Kopinak, Louis Lefeber, Maureen A. Molot, Viviana Patroni, Fred Rosen, Judith Teichman, Carol Wise, and in particular Tom Legler, for helpful comments on an earlier draft of this article. Final responsibility for ideas in this paper rests exclusively with the authors.

1. The figure is taken hour Gary Gereffi, "Paths of Industrialization: An Overview," in Gary Gereffi and Donald L. Wyman, eds., Manufacturing Miracles: Paths of Industrialization in Latin America and East Asia (Princeton: Princeton University Press, 1990), p. 10. 2. Thus the term "inclusionary corporatism" is sometimes used to characterize the PRI model of governance. 3. The PRI regime has often been called a ”dictablanda," instead of a "dictadura." In Spanish, dictadura means dictatorship; dura means hard; and blanda means soft. 4. Salinas, interviewed by Tim Padgett, "Reform at Two Different Rhythms," Newmeek, December 3,1990, p. 39. 5. Angel Garcia, undersecretary of International Financial Affairs in the Finance Secretariat (Hacienda), quoted in Claudia Fernández, “Successful Privatization Plan Provides Model,” El El Financiero Internacional, December 7,1992, p. 14. 6. Denise Dresser, Neopopulists Solutions to Neoliberal Problems (La Jolla: Center for U.S.-Mexican Studies, University of California at San Diego, 1991), pp. 1-2. 7. The term "conditionality" has been widely applied to IMF "policy packages" that dictate domestic policy. We are suggesting that NAFTA creates similar—although permanent, not temporary—constraints on domestic policies on Canada and Mexico. See our ”The Political Economy Of North American Integration: Diverse Perspectives, Converging Criticisms,” ch. I in Grinspun and Cameron, The Political Economy of North American Free Trade. 8. This conclusion is warranted by the Canadian experience. NAFTA explicitly prohibits direct export promotion, following GATT. However, U.S. trade law, legitimized by NAFTA but not by GATT, sees many government interventions as "unfair trade actions," thus triggering U.S. trade litigation, The "nullification and impairment' clauses in NAFTA effectively require compensation if the Mexican government takes action that reduces current or potential benefits to corporations from the other country. These and other provisions have far-reaching implications since they effectively restrict many types of government intervention. 9. Judith Teichman, "The Dismantling of the Mexican State and the Role of the Private Sector," in Grinspun and Cameron, The Political Economy of North American Integration. 10. "Union chief approves change to labor law," El Financiero Internacional, June 29, 1992, p. 4. Opponents argue the objectives of the proposed changes were "to eliminate fixed wage scales, give preferences to non-union employment, and restrict the right to strike." 11. Noteworthy was the wildcat work stoppage and police-enforced lockout at Volkswagen de México. The Federal Labor Arbitration Board granted the firm's petition to cancel its union contract and fire its nearly 15,000 union members. Talli Nauman, "Is labor law losing teeth in face of free trade?" El Financiero Internacional, September 7, 1992, p. 12. 12 John Sheahan, Conflict and Change in Mexican Economic Strategy (La Jolla: Center for U.S-Mexican Studies, University of California. San Diego, 1990), p. 9. 13. Alejandro Alvarez Béjar "Economic Crisis and the Labor Movement in Mexico," in Kevin J. Middlebrook, ed., Unions, Workers, and the State in Mexico (La Jolla: Center for U.S.-Mexican Studies, University of California at San Diego, 1991), p. 33. Another way of looking at inequality is mentioned by Alarcón and McKinley: In 1997 the top 10% of Mexican families earned almost 37% of total income, whereas the bottom 80% accounted for only 46%. Diana Alarcón and Terry McKinley, "Beyond Import Substitution: The Restructuring Projects Of Brazil And Mexico," Latin American Perspectives Vol. 19, No. 2 (Spring 1992), p. 78. 14. Robert Kaufman, "Economic Orthodoxy and Political Change in Mexico: The Stabilization and Adjustment Policies of the De la Madrid Government" in Barbara Stallings and Robert Kaufman, eds., Debt and Democracy in Latin America (Boulder: Westview, 1989), p. 117. 15. Dan La Botz, Mask of Democoacy: Labor Suppression in Mexico Today (Boston: South End Press, 1992), p. 19. 16. Alejandro Alvarez Béjar, "Economic Crisis and the Labor Movement in Mexico," p. 39. 17. Office of Technology Assessment, U.S. Congress, U. S.-Mexico Trade: Pulling Together or Pulling Apart? ITE-545 (Washington, D.C.: U.S. Government Printing Office, October, 1992), p. 69. 18. Quoted in William Schomberg and Ted Bardacke, "Doing Business With the Big Boys," El Financiero International, October 19, 1992, p. 14. The anonymous government official does not see an inconsistency between concentration and competition. Schomberg and Bardacke inform us that the 25 largest companies in Mexico account for a 47.1% share of the nation's GDP. In the United States, the top 25 produce juss 4.3% of GDP, 19. Clearly, many and more productive jobs can address inequality only if wages are linked to productivity and provide for a decent living standard. This is a far cry from the Mexican reality, though. Even the more productive new industrial sectors, such as automobile, pay appalling wages. 20. Office of Technology Assessment, U.S.-Mexico Trade, p. 69. The official statistics of unemployment in Mexico use useless, among other reasons because they count anyone who wark an hour or more per week among the employed. 21. Agustín Escobar Latapí and Mercedes Gonzáles de la Rocha, "Introduction," in M. Gonzáles de la Rocha and A. Escobar Latapí, eds., Social Responses to Mexico's Economic Crisis of the 1980s, (La Jolla: Center for U.S.-Mexican Studies, University of California at San Diego, 1991), p. 9. 22. Secretariat of Commerce and Industrial Development (SECOFI), The Mexican Program for the Modernization of Industry and Foreign Trade, 1990-1994 (Mexico City: Government of Mexico, circa 1989), pp. 39-39. 23. Merilee S. Oriente, "The Response to Austerity: Political and Economic Strategies of Merico's Rural Poor," in M. Gonzáles de la Rocha and A. Escobar Latapí, Social Responses to Mexico's Economic Crisis, p. 132. 24. Jorge Calderón S., cited in Kathryn Kopinak, "The maquiladorization of the Mexican economy," in Grinspun and Cameron, The Political Economy of North American Free Trade. 25. Manufacturing employment in Mexico felt from 2.51 millions jobs in 1982 to 2.36 million in 1991. El Financiero International, June 8, 1992, p. 12. 26. Quoted firom Kathryn Kopinak, “The Maquiladorization of the Mexican Economy.” 27. See the chapters by K. Kopinak and E. Velasco Arregui in in Grinspun and Cameron, The Political Economy of North American Free Trade An important aspect is agricultural productivity, which depends on government assistance for new infrastructure (such as irrigation and draining projects) as well as technical and financial support to small farmers. However, current Mexicam policy is gradually eliminating this type of support to agriculture. 28. Canadian opponents of free made argue that the free-trade agrement with the United States restricts the Canadian government's ability in intervene in the marketplace, through, for example, industrial or trade policies. See chapters by Bruce Campbell, Mel Watkins and Ricardo Grinspun, in Grinspun and Cameron, The Political Economy of North American Free Trade. 29. Judith Teichman, "The Dismantling of the Mexican State and the Role of the Private Sector." Parastatals are Mexican state enterprises. TELMEX is the state telephone monopoly. 30. "Oligopolies Rule," El Financiero International, October 19, 1992, p. 1. 31, Rosa Albinaa Garavito andAugusto Bolívar, México en la década de los ochenta (Mexico: UAM-Azcapotzalco, 1990), p. 301. 32. Mexico produced about 17.6-million metric tons of grains in 1980, and consumed 22.4. By 1990 Mexico produced 20.4 and consumed 27 million, so the gap widened. See Gary Hufbauer and Jeffrey Schott, North American Free Trade Issues and Recommendations (Washington: Institute for International Economics, 1992), p. 282, According to this data, grain consumption grew at an average annual rate of 1.9% during the 1980s. Population grew during the same period at 2.0% per year, so there was a fall in per capita consumption during the period. 33. The important question of food self-sufficiency and rural development is analyzed by David Barkin in "About Face," NACLA Report On The Americas Vol. 24, No. 6 (May 1991); and in more detail in his Distorted Development: Mexico in the World Economy (Boulder: Westview, 1990). 34. “The 1992 reforms substantially changed the rules for land ownership and use. Ejidatarios will get title to their lands. While individuals are still limited to 100 hectares, foreigners can purchase land on much the same basis as Mexican citizens. Corporations, domestic and foreign, may own up to 2,500 hectares (about 6,200 acres)." Office of Technology Assessment, U.S.-Mexico Trade, p. 201. 35. The number is taken from Office of Technology Assessment, U.S.-Mexico Trade, p. 67. 36. David Barkin, "State control of the environment: Politics and degradation in Mexico," Capitalism Nature Socialism Vol. 2, No.1 (February 1991), pp. 86-109. 37.About half the foreign investment that came in 1991 went into the Bolsa (stock market). Janet Duncan, "Foreign investment to slow in 1992," El Financiero, International, January 27, 1992, p. 3. 38. The deficit may reach $20 bilion in 1992—the largest ever. Only a few months ago, the projections were much lower, implying that the external imbalance is getting out of control. See Jesús Sanchez, "1992 Current Account Deficit to Hit $13 Billion: Banxico," El Finnciero International, March 2,1992, p. 4. 39. “The main question confronting Mexican companies is whether these [foreign] investors are willing to become long-term investors in Mexico, or whether they will fleeat the first sign of trouble.” See "Taking stockof the companies," El Financiero International, April, 1992, p. 14. 40. C, Cárdenas, "The Continental Development and Trade Initiative," in John Cavanagh, et al., eds., Trading Freedom: How Free Trade Affects our Lives, Work and Environment (San Francisco: Institute for food and Development Policy, 1992), pp. 95-100

Tags: Mexico, foreign investment, PRI, NAFTA, neoliberalism

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