Public Policy: Mexico

Discredited Disaster Policy Undermines Political Regime

Post World War II Policy Making Aimed at PROMOTING ECONOMIC

GROWTH • Massive public investment • Elite consensus on state’s role in economy

– Prevailed until 1970’s – State facilitated private capital accumulation– State was nation’s largest entrepreneur– State served as guiding force (rector)

• Mexican economic miracle (1950’s to 1970’s)• By late 1970’s Mexico at upper end of World

Bank’s list of semi-industrialized countries

Early 1980’s: Exhaustion of ISI model forces change

• 1976-82 – Term begins with

petroleum fueled economic boom

– Corruption– Technology advances

bypass many ISI industries

– Oil prices plummet

• Jose Lopez Portillo

Before the Change: Distributive Policy of PRI controlled State

Reduced Poverty• Benefits did trickle down to the poor • 1950-80: poverty in absolute terms

declined • Illiteracy dropped from 35% to 15% of the

population

Dark Side to PRI Economic Successes

• Ownership of land and capital increasingly concentrated

• Personal income inequality increased– 1977- poorest 70% of Mexicans families

received only 24 % of all disposable income– Richest 30% of families received 76% of

income

Other Social Indicators of the “Dark Side”

• 25% of children under five years of age malnourished (as of 1990)

• Only 54% of those starting primary school finished

• 57 %of dwellings had no sewerage connections

• 51% had no piped water inside • 70% population (classified by government) as

living in “extreme poverty”

Populist Policies & Debt Crisis (oil boom of 1970’s ends )

• Central government revenues expands and contracts

• Public spending for health and social security remained constant (in real per-capita terms)

• 1982 debt crisis forces changes – Made it impossible to maintain existing spending levels

for health and social programs– 1986 – debt service consuming over half federal

government budget

Shift to Neo-liberalism (1982 -1993

• Alternative to state socialism and ISI• Rate of economic growth pushed upwards • Rectorship of economy not completely

given up by technical elite residing in Mexico City

• 1993 – signing of NAFTA Treaty signals ascendancy of neo-liberalism

Consequences of neo-liberalism

• Macro-economic indicators show increase in growth rate

• Inequality problems exacerbated because of distributive policies

• Job creation anemic– Influx of foreign capital purchases machinery – Over half of investment ended up in financial

instruments – rather than in job-creating, direct investment projects

Overall Evaluation • Neo-liberalism facilitated macro-economic

growth • By itself appears incapable of necessary job

creation• Government needs to invest in upgrading

worker skills• Danger that gains from NAFTA will bypass

the largest segment of the population

Shantytown in Ciudad Juárez

Outskirts of Mexico City

Extractive Policy and the Financing of Development

• For most of post-World War II period Mexico’s tax effort (rate of taxation and performance in collecting taxes) was among lowest in world

• Even after tax reform of Salinas administration (1988-94)– Over sixty percent of revenue from socially

regressive taxes – Income tax rates for wealthiest Mexicans

reduced

Special Extractive Factor : Oil Policy in Mexico

• 1911: Mexico begins to export oil• 1917: Article 27 of the Constitution gives the

Mexican government a right to all subsoil resources

• 1921: Peak of oil production in Mexico, due to increased demand from WWI

• 1920s: Mexico is second only to the U.S. in petroleum output

U. S. Acquiesces to Nationalization of Petroleum Fields

• Nationalization of oil (Lazaro Cardenas)

• 1944: Mexico pays U.S. oil companies $24 million, plus interest at 3 percent, as compensation

• Mexican and U.S. officials develop a 20-year plan to expand Mexican oil industry

Mexico Finds More Oil (1974 – 75)

• Crude-petroleum deposits discovered in the states of Campeche, Chiapas, Tabasco, and Veracruz

• Provide an economic boost amidst rising inflation

• Mexican oil production more than doubles• USA – most important market for Mexican oil

PEMEX Receives US$12.6 billion in International Credit

• Money used to construct and operate offshore drilling platforms,

• build onshore processing facilities,

• enlarge its refineries

• engage in further exploration

• purchase capital goods from abroad

Decreased income from sale of oil

• 1980s

• Oil prices fall

• Mexico is blocked out of the market by refusing to lower their prices

• Increase in debt reduces economic activity

• 1981

• Foreign banks acquire 87% of PEMEX assets

• Recession stimulates capital flight

• Devaluation of the peso

Mexican Petroleum Industry: Late 1980’s

Attempts to Modernize • PEMEX inefficiency makes

for decreasing competitiveness

• Salinas breaks the power of oil workers’ union

• Efficiency of PEMEX increases

• Production levels continue decline

President Salinas Gortari(Harvard trained economist)

Program for Redevelopment and Restructuring of Energy Structure

1996 • Goal – increase energy

exports • Improve competitiveness in

international market • Stimulate more regional

development inside of Mexico

Investment by 2000

• 250 billion pesos (at 1995 prices)

• 49 billion from private sector

PEMEX Today

• Despite the $77 billion in revenue earned each year, PEMEX is forced to pay extremely high taxes to the government that keep PEMEX in incessant debt.

• In order to keep their company going, PEMEX has borrowed an excess of money and is now $42.5 billion in debt.

• With the record breaking oil prices starting in 2005, resulting partially from the Iraqi war, PEMEX has seen a rise in revenue.

Impact of Shortcomings within Policy Functions: Problem of Implementation

• Despite increased profits during President Fox’s administration, few debts have been retired

• Unexpected income has been used to pay the salary of bureaucrats and current costs.

• Production capacity continues to decline

Current Mexican Oil Production • Average oil

production decreased by 500,000 barrels per day (2005-07)

• Political conflict over who should invest in the oil industry

Consequences of Policy: Developmental gap persists between urban North, and rural, mostly indigenous South

Current Challenges(Economic Policy)

– Economy that produces too few jobs to accommodate the number of people entering the job market

– Educational system in need of modernization

– Growing impoverished population• Half of Mexicans live below the official poverty line

– Highly unequal distribution of income

– Acute environmental problems

More Policy Challenges: Economic

– Must catch up to its international trade partners/competitors

– Modernize its agricultural sector– Renovate energy sector– Expand the tax base– Corruption

Government Performance: Challenge of Security and Crime

• Establishing the rule of law– Greatest failure of all– Cannot deal with street crime– ¾’s of crimes go unreported; why? Citizens’ low

expectations that the perpetrators will be caught and punished.

– Real progress only by addressing underlying causes

Drug Trafficking

Cartels often more powerful than the government

Mexico’s Political Future

State of the political system

• Elections – more democratic and transparent than in most of Latin America• Talk of weakening the presidency and strengthening Congress

• Classification: a democracy