Economic transformation the Mexican way

148 Pages·1993·3.644 MB·English

by  Pedro Aspe

Economic
Transformation
the Mexican Way
The Lionel Robbins Lectures PedroAspe
Peter Ternin, Lessons from the Great Depression, 1989
Paul R. Krugman, Exchange-Rate Instability, 1989
Jeffrey Sachs, Poland's Jump to the Market Economy, 1993
Pedro Aspe, Economic Transformation the Mexican Way, 1993
The MIT Press
Cambridge, Massachusetts
London, England
© 1993 Massacl\usetts Institu«: of Technology To Concha
All rights reset"V'ed. No part of this book m<iy be reprodm:ed in any form To Sofia, M6nica, Pedro, and Carlos
by any electronic or m~nical means (including photocopying, record
ing, or information storage and retrieval) without permission·in writing hoping they will live in a fairer
from the publisher.
and more prosperous Mexico
This book was set in Palatino by DEKR Corpor~tion, Woburn, MA and
printed and bound by Maple-Vail.. Inc. in the United States of America.
Library of Congress Cataloging-in~Publication Data
Aspe Armella~ Pedro.
Eoonomic transformation the Mexican way I Pedro Aspe.
p. em. -(The Uonel Robbins lectures)
lndudes bibliographical references and index.
ISBN ()..262-01135-2
1. Mexico--Economic policy-1970- ~-Fiscal policy-Mexico.
3. Economic stabilization-Mexico. I. Title. II. Series.
HC !35.AB328 1993
338.97'2-dclO 93-19949
C!P
Contents
Preface ix
1 Macroeconomic Adjustment and Social Consensus:
The Mexican Stabilization Program (1983-1991) 1
2 Financial and Fiscal Reform 61
3 Structural Change of the External Sector 123
4 Thoughts on the Mexican Privatization
Experience 177
5 Prospects for the Mexican Economy: A Look at the
"New Mechanism of Transmission" 223
Notes 251
References 263
Index 273
Preface
On Christmas Eve 1990 I received a very pleasant albeit
unexpected caU. On the other end of the line was my good
friend Richard Layard, who was eager to break some excit·
ing news: an invitation from the Lionel Robbins committee
to be its lecturer for 1992. When we finished our conv~r­
sation, I was not only thrilled by the honor of this dlstinc·
tion, but also especially moved by the memories of the
impact that the writings of Professor Robbins have had
throughout my career as an economics stodent, a teacher,
and a public servant.
I have to go back to the very beginning of my experience
as an economist to trace the history of what I learned from
the ideas of Mr. Robbins. It was during my first course in
political economy that I read his Theory of Economic Policy.
Thereafter I think I must have read every work that came
from his fertile pen: The Economist in the Twentietk Century,
Autolnography of an Economist, An Essay on the Nature and
Significance of Economic Science, and the vast succession of
articles, both constructive and controversial, which he con
tributed to various professional and other journals.
In many ways I think that Professor Robbins is one of the
most prescient economists of our time. His vision of the
Preface X Preface xi
role of the state and economic policy on economic growth read him has to do with the contradictions I found between
and the well-being of society foresaw most of the rapid the national project for Mexico, as established in our Con
changes that we are now witnessing in every country of stitution, and the way in which we as a country were trying
the world. Almost half a century ago, when the debate to get there. Our stated objective is to remain a sovereign
between Keynesian and classical economics seemed to ·nation, capable of deciding how to define its role among
divide the options for market economies into either a strong the other nations of the world. We responded to the call fur
government presence in every area of the economy or the · sovereignty by isolating ourselves from new ideas ·instead
unrestricted predominance of market over social needs, of seeing that sovereignty is achieved through innovation,
Robbins was the only one to come out with what economic imagination, competition, and cooperation in an integrated
experience is proving to be the most pragmatic and respon world.
sible definition of the role of economic policy in economic The constitutional aim of Mexico is a democratic one
development. achieved not only through free access to the polls and free
He rightly said that it was not for the state to intervene dom of speech, but also through the right to an education,
where markets can do better in terms of resource allocation to a job, to a fair salary, to do business, to health, to an
and distribution of income; but he also stated that it was adequate pension, to decent housing and other bask needs.
equally unwise to forego the capacity of the state to regulate Our failure in carrying out this mandate lay in thinking that
when markets fail to grant equal access to every individual the state on its own had to provide everything, without
or remain blind to the realities of poverty and marginali respect for the initiatives and creativity of individuals.
zation. As economic policy has been catching up with the Modernization as it is taking place in Mexico is not an
reality of our time, the ideas of the great political economists abstract concept for academic debate; rather it has a pro·
like Robbins acquire a new social dimension and inspire found social dimension. It is the commitment to respect the
people everywhere to produce greater fairness and wealth initiatives of the community and to promote individual
within their societies. achievement; it is based on the inevitable need to increase
·Almost nine years ago, Mexico chose the road to mod the importance of the citizen and better organize the build
ernization. At a time when we were immersed in the con ing and running of the state. It is aimed at strengthening
fusion of an economic crisis and deceived by the mirage of Mexico through unity, progress, and social justice. My gen·
our paternalistic state, we had to look again at the funda eration was educated in a context where the greater pres
mentals. We had to define the way in which the productive ence of the state was thought of as synonymous with more
forces of our country should be reorganized to produce social justice. For many years, when it was necessary to
goods and services and bring the benefits of growth to all promote the industrialization of the country, the state cre
members of society. ated enterprises and public entities to channei resources
Maybe the reason I was so touched by the candid and and subsidies. It bought companies in financial difficulties
yet profound explanations of Professor Robbins when I first to save jobs and to support production.
Preface xii Preface xiii
From the evidence provided by the years of crisis, we can the recent developments in Mexico from a long-run per
now say that these were not always the right decisions. We spective, especially as regards structural change.
know that a bigger state is not necessarily a more capable In the first lecture I talk about the macroeconomic stabi
state. In reality, in the case of Mexico, more state meant a lization experience of Mexico, placing special emphasis on
diminished ability to respond to the social needs of our its social and political aspects. The success already achieved
fellow countrymen, and in the end, a weaker state. While in terms of stabilization, production, and employment,
the productive activity of the public sector increased, atten especially during the last four years, has been as much the
tion to the problems of drinking water, health, investment result of fiscal and monetary discipline as of the orderly
in agriculture, nutrition, housing, environment, and justice negotiation and consensus of workers, farmers, entrepre
deteriorated very rapidly. The stabilization of the economy neurs, and the government through the existing institu
through realistic budget management, the privatization of tional channels.
state-owned enterprises, fiscal refonn, economic deregu In the second lecture (chapters two, three, and four), the
lation, financial reform, the liberalization of trade, the rene analysis of the Mexican economy focuses on the structural
gotation of the external debt, and the strengthening of land aspects of the reform of the state regarding the external
tenure rights is the new way in which the people of Mexico sector and the efficiency and distributional impacts of fiscal
are carrying out an ambitious reform of the slate. We are and financial reform. It goes on to show how the partici
facing the challege of making the transition to an open pation of the entire society has been increased by macro
economy and an open society. In abandoning its role of economic adjustment, and is now replacing the state in its
proprietor, the state has taken on greater solidarity with the role as leader of the economic development of Mexico.
needs of the poor. Finally, in lecture three (chapter five) I summarize the
I have had the great opportunity of living through a way in which all these changes have brought about a pro
period of extensive change in the economic history of Mex found transformation of the economy, in that it is now much
ico, and it has been my good fortune to observe some of it better prepared to face the uncertainties of a rapidly chang
from favorable positions. The purpose of this book is to ing and challenging world and to respond more effectively
provide a straightforward account of the way in which to the social needs of our population.
Mexico has been going through this transition.
As I understand it, Lionel Robbins used to tell anyone
doing research with him that while the description of eco
nomic policy at a given tlrne can help us to see how the
different elements of society interact, it is only through
economic history that one can understand why these rela
tionships exist the way they do. Following this valuable ·I
remark, I decided to prepare these lectures by looking at
1 Macroeconomic
Adjustment and
Social Consensus:
The Mexican
Stabilization
Program(l983-1991)
For many developing countries, the last decade has meant
a protracted effort to reestablish price stability and consol
idate the basis of sustained economic growth. Unfortu
nately, after repeated attempts at stabilization based on
partial correction of budget imbalances and the balance of
payments, economies often find themselves facing hyper
inflation once again, weakened by capital flight and the
disintegration of their financial systems and immersed in a
deep recession in which standards of living are falling rap
idly and unevenly.
From the point of view of the design and evaluation of
economic policy, it cannot always be said that these econ
omies are in such a disastrous state simply because their
governments are not willing to follow conventional stabi
lization measures based on financial austerity and the
realignment of the real exchange rate. In fact, the problem
for the government gets worse when, in spite of all attempts
I
to make adjustments, the results are very limited. Therefore
it has become indispensable to look for non-recessive wa¥s
l
of controlling inflation.
Since 1985, several developing countries such as Bolivia,
Israel, ru;td Mexico have decided to move away from con- I
l
Chapter 1 2 ~croeconomic Adjustment and Social Consensus 3
ventional aggregate demand adjustment programs. To stop app~cation ~f macroeconomic policy during the last year of
high and persistent inflation, they have included some com President Miguel De Ia Madrid's government and the first
bination of incomes policies along with the usual fiscal and three of President Salinas de Gortari. Special attention is
monetary measures. These stabilization programs, non ?aid t~ the management of monetary,_ fiscal, and trade pol
orthodox to a certain extent, represent an important change Icy: ~nee and wage administration, and the role of public
in the way in which policy makers interpret fundamental oprmon and expectations in the consolidation of the Mexi
can stabilization program.
economic relationships. From this perspective, the dynam
ics of prices, wages, industrial structure, and the regulatory
and institutional characteristics of foreign currency and 1 Inflation and Stabilization in Developing Economies:
financial markets help to explain both the persistent, high Chronology of the Typical Route to a Crisis
inflation and fiscal and monetary imbalances. The concep
tion and implementation of programs of this type stem from , Developing countries' experiences with inflation are similar
the idea that monetary and public expenditure policies are in many ways. An analysis of these similarities can afford
not able to simultaneously achieve low inflation and avoid us a better understanding of its dynamics and persistence.
a deep recession. To stabilize successfully, it is also neces The chronology of the crises of the 1980s begins in most
sary to correct the inflationary momentum and structural cases with a phase of acceleration of aggregate demand
growth, almost always caused by budget overruns that
weaknesses of economic systems. ·
To thoroughly explain the interaction between the insti up_set the climate of exchange rate and prevalent price sta
tutional and macroeconomic development of the Mexican bility. At first this increase in public spending and the fiscal
economy, this chapter has been divided into four sections. deficit have limited effects on internal inflation, in large
The first examines the main aspects of the inflationary and part ~ue to t~e fact that the rapid growth in imports in the
recessive crises in the developing countries. Particular public and pnvate sectors is accompanied by greater foreign
debt.
emphasis is put on the influence of imperfect markets,
I
! budget rigidity, and the dynamics of price and salary con During this stage there is growth, an appreciation ~f the
tracts on the severity and duration of the crises. The next real exchange rate, and a substantial improvement in the
section compares the stabilization theories for developed standard of living; per capita consumption increases, real
countries, taking a nonorthodox view of structural change wages grow, and there is a reduction in the rates of unem
programs. It will also specify the scope and the limitations ployment and underemployment. The first negative effects
of monetary, fiscal, and exchange rate policies. The thir~ of the fiscal i~balance and the foreign debt are typically felt
section presents the background to the Pact for EconomiC m the finanoal sector. Part of the reason for this is that the
Solidarity (Pacto de Solidaridad Econ6mica), together with change from stable growth to the acceleration phase is not
a description of the Mexican economy between 1982 and backed b~ a corr:sponding flexibility in the financial sys
1987. Finally, the fourth section summarizes the design and tem. The msufficrency of total savings and financial media-
Chapter 1 4 Macroeconomic Adjustment and Social Consensus 5
lion is aggravated by the lack of an efficient money market, 1 recessive effects whenever the redistributive effects of the
controlled interest rates, and an excessively regulated bank crisis further reduce the available income in high-spending
ing system. 2 When interest rates do not reflect the magni sectors. As production fa!Js, inflation accelerates and hits
tude of accumulated imbalances, the balance of payments the working classes once again. Even though the fiscal
begins to be dominated by capital flight. 3 As a consequence adjustment is consistent .with the balance of payments
of these distortions, billions• of dollars in public sector and restriction, it is insufficient because of the limited sources
commercial bank credits are "recycled" abroad. In the of non-inflationary financing and/or because of the real
meantime, the improved real exchange rate gives the public effect that the depreciation of the exchange rate has on the
an excellent opportunity to obtain capital gains by altering public debt. However, in many other cases stagnation,
the composition of their portfolios in favor of foreign cur- ~ together with inflation, reflects higher input costs caused
rency instruments. 5 by the recessive effect of the adjusted exchange rate on
Finally, when the current account deficit and capital flight aggregate supply.
have consumed both international reserves and new When the first phase of the stabilization program has
sources of transfers from abroad, the central bank with finished, the country is immersed in a deep recession, and
draws from the foreign exchange market. There is a major inflation is higher and more persistent than before the cri
devaluation of the real exchange rate, and it becomes nec sis. 81t would therefore seem that what is needed is an even
essary to seek emergency funds. In most cases, access to greater recession to bring inflation back to where it was
these funds will be conditional on the adoption of a stabi before the collapse. From an external accounts point of
lization program arranged with the International Monetary view, macroeconomic adjustment policies give fast results.
Fund (IMP). These programs usually demand substantial The current account shows an important surplus due to the
cuts in public spending, the realignment of relative prices fall in imports, and capital repatriation is sparked by a
(including public sector prices and tariffs), a modification reduction in the expected rate of depreciation.
of price controls in sluggish sectors , and the commitment The persistence of inflation in each case depends on struc
· to maintain restrictive credit policies and an undervalued tural factors. 9 The initial devaluation has a great impact on
real exchange rate. general price levels. All tradeable goods suffer price incre
The resulting recession has very unequal effects on dif ments in their local currency in proportion to the devalua
ferent sectors of the population. The burden of the adjust tion, while the increase in the price of imported
ment program tends to fall on the working classes, not only intermediate-use and capital goods affects production
because subsidies are eliminated, but also because capital costs. The initial price increase is followed by an out-of
is more mobile than labor. Therefore, when foreign phase contractual wage raise that attempts to recover
exchange controls do not work, it becomes even more dif purchasing power. This increase in nominal wages will be
ficult to realign the real exchange rate without lowering real followed by another wave of price increases. The effects of
wages. 6 Monetary and fiscal adjustment" have additional the exchange collapse set in motion a price-wage-price spi
ral in such a way that a "once and for all" adjustment, such
Chapter 1 6 Macroeconoll'\ic Adjustment and Social Consensus 7
as a maxi-devaluation of the exchange rate, is in fact trans economies that are equally applicable to industrialized and
lated into higher rates of inflation. developing countries. For example, there is no substitute
At the same time, the improvement in the balance of for monetary and fiscal discipline as necessary conditions
payments allows the central bank to accumulate reserves. for growth with price stability. However, neoclassical
Then it is possible to put into effect an anti-inflationary macroeconomic theory, conceived in the context of insti
strategy based on fixing the nominal exchange rate. It is tutions in developed countries, finds it difficult to explain
hoped that this strategy will result in a moderate, temporary and propose policy solutions for the inflationary processes
appreciation in the real exchange rate. For some time the of developing countries.
monetary authorities stop responding to nominal wage Looking at the postwar period, one may conclude that in
hikes with proportional increases in the nominal exchange developing countries inflation is generally higher, more
rate, in the belief that decelerating inflation of tradeable vo!i'tile, and therefore more difficult to control than in
goods and inputs will have repercussions on the prices of industrialized nations. Although these contrasts can be
the other primary factors. Although inflation slows down, partly eXf!lained by the different behavior and credibility of
the momentum caused by ex post indexed contracts triggers monetary and fiscal policies between countries, institu
a rise in real wages and brings about anappreciation of the . tional 'aspects also come into play. In the first place, the
real exchange rate. This stabilization strategy, known a~ fmancial structures in developing countries allowed them
"soft landing," usually leads to a new balance of payments to depend more on the inflation tax to cover their public
crisis before inflation targets can be achieved. deficits. For example, the absence of a money market makes
In this way, only if there are adequate reserves (and/or it more difficult to cover fiscal commitments by means of
foreign savings) or if contracts are "forward looking" can voluntary savings.10 Regarding the volatility of inflation,
inflation "land" gradually. On the contrary, if these condi because developing countries depend heavily on foreign
tions are not satisfied, there will be a new crisis, which will investment and export only a limited selection of products,
require a new adjustment program based on greater fiscal they are very sensitive to variations in terms of trade and
and monetary austerity, adding to the frustration and incre interruptions in flows of funds from abroad. There are also
dulity of everyone involved. important differences in the transmission mechanisms. In
industrialized countries, an imbalance in the current
2 Neoclassical Theory and Stabilization account-amsed. either by an autonomous increase in
in Developing Countries domestic absorption or by unfavorable developments in
trade agreements-results in higher interest rates to attract
2.1 Inflation in Developed and Developing Countries the flow of resources needed to fill the gap. However, where
financial repression exists, interest rates do not respond.
Neoclassical economic theory establishes some essential This means that if the country cannot obtain sufficient quan
principles for the macroeconomic handling of monetary tities of foreign investment, even with transitory fluctua-