THE DE LA MADRID-SALINAS REFORMS CAN BE seen as a response to problems created by the Mexican model of import-substitution industrialization (ISI) that governed policymaking during the post-war period. Under President Luis Echeverria (1970-1976) these problems showed up as growing public deficits, high inflation, in- equality in the distribution of income and balance-of- payments disequilibria. The strategy of ISI, which was widely pursued in Latin America at that time, created a significant manufacturing sector, but one that was ineffi- cient and protected, dependent on imported capital goods and technical assistance, capital-intensive, and heavily subsidized by the public sector. Skewed income distribu- tion meant only the middle and upper classes had signifi- cant purchasing power. The small size of the domestic market severely limited industrial growth. Artificially low prices for food staples impoverished the rural sector and subsidized urban wages. An overvalued peso cheapened imports of capital goods for manufacturing, and consumer goods for affluent groups, and hurt agricultural exports. These policies resulted in rural and urban unemploy- ment, accelerated migration to the cities, a large informal economy, and the persistence of income inequality. While Mexico City and othercities grew, and the urban middle class aspired to European lifestyles, the shantytowns and rural areas remained poor and underdeveloped. President Jos6 L6pez Portillo (1976-1982) ignored the signs of impending crisis. He avoided making the necessary adjustment of the economy after the discovery of huge deposits of petroleum coincided fortuitously with oil price hikes caused by the formation of the OPEC cartel. In 1976 Mexico had been forced to approach the International Mon- etary Fund (IMF) for a stand-by agreement to stabilize the economy. The oil boom made the international financial markets optimistic about Mexico's future growth. Oil rev- enue allowed Mexico to overborrow because the interna- tional banks did not believe that an oil exporter could become an insolvent debtor. L6pez Portillo paid off the IMF and returned to expansionary policies. As a result, the Mexican foreign debt more than doubled between 1978 and 1983, while the current-account deficit reached a record $12.5 billion in 1981.' However, these funds were not used productively, creating the basis for the crisis in the early 1980s. Between 1978 and 1981 Mexico's annual growth rate was over 8%. Expansionary policies resulted in inflation and social unrest as the economy overheated and struggles over income distribution intensified. Central-Bank loans to the private sector caused the money supply to grow and the currency to weaken. An inevitable devaluation of the peso was postponed, and capital flight ensued as investors sought safe-havens for their capital. Thus, capital flight and loss of reserves occurred simultaneously. 2 As the international envi- ronment became increasingly adverse-with the decline in the price of oil and other exports, global recession, high real interest rates, and protectionism in the developed countries, Mexico announced in August, 1982 that it was unable to service the interest on its international debt obligations. The next month, L6pez Portillo nationalized the Mexican banks. The decisive policy shift took place when Miguel De la Madrid took office. Under L6pez Portillo state-owned enter- prises grew, the ministries of Finance and Treasury (tradi- tional mainstays of financial orthodoxy) were weak, and the alliance between the PRI and the private sector broke down. De la Madrid's government embodied "a strong political resurgence of the technocratic factions associated with the Treasury and the Central Bank, a sharply diminished role for politicos connected with the PRI and the labor movement, and the virtual elimination of structuralist and neo-Keynesian economists from top levels of government."' 1. Rosa Albina Garavito and Augusto Bolivar, Mixico en la dicada de los ochenta: la modernizacidn en cifras (Mexico: UAM-Azcapotzalco, 1990), p. 117, and Judith A. Teichman, Policymaking in Mexico: From Boom to Crisis (Boston: Allen & Unwin, 1988), pp. 153-4. 2. More than $11 billion left the country in 1981, and perhaps $40 billion during the period 1980-84. Estimates for the decade as a whole range up to $80 billion. U.S. Congress, Office of Technology Assessment, U.S.-Mexico Trade: Pulling Together or Pulling Apart? ITE-545 (Washington, DC: U.S. Government Printing Office, October 1992), p. 68. 3. Robert Kaufman, "Economic Orthodoxy and Political Change in Mexico: The Stabilization and Adjustment Policies of the De la Madrid Administration," in Barbara Stallings and Robert Kaufman, eds., Debt and Democracy in Latin America (Boulder: Westview Press, 1989), p. 114.
