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Those outdated — preNAFTA — economic models were… right?

20 June 2005

What’s wrong with Mexico? Given the prevailing conservative orthodoxy, the economy should be growing, not stagnant. According to Professor Calva, the problem is with the orthodoxy. The old system – channeling government assistance to key sectors like agriculture led to more growth than the “neo-liberal” approach. I normally don’t read (let alone translate) wonky data studies from conservative newspapers, but two things struck me… that neo-liberalism loses more support every day, and that the dreaded change to a left-wing government is neither a radical nor anti-business change.

México and the Washington Consensus
José Luis Calva

(EL UNIVERSAL, 17 June 2005)
(My translation)

IN our country, we have weathered a decade of “structural reforms” and “macroeconomic disciplines” recommended by the International Monetary Fund and the World Bank to developing nations. What John Williamson dubbed the “Washington Consensus” has shown poorer results here than anywhere else in Latin America (see UNIVERSAL 10/June/05). Not for lack of effort: Williamson himself notes that since the end of the 80s, Mexico’s neo-liberal governments have been quick to adapt, and outstanding executors of, prescriptions laid out by the Washington consensus.

What Williamson encountered in our country was precisely what was needed: a “robust budget surplus”; “extreme fiscal austerity”; reductions in the top income tax rates; an export-oriented economy; accelerated commercial opening; “impressive liberalization of foreign investment rules”; widespread privatization; a liberalized financial system beginning in 1988; and important measures of deregulation in economic activities. (See J. Williamson, The progress of policy reform in Latin America, for Institute International Economics, Washington, DC, 1990).

Of course, an attachment to the dogma of reducing the role of the State in favor of the market and an agreement with the “extreme fiscal austerity,” comes a drastic reduction in spending on programs to stimulate the economy in some sectors.

The unilateral and abrupt commercial opening constituted a spear-point of the new economic strategy based on the Washington Consensus. In agreement with orthodox theories, liberalizing the foreign trade and reducing internal debts (or even suppressing them) “distorting” governmental interventions to channel productive resources towards those branches of the Mexican economy where the country has a comparative advantages (mainly in labor intensive manual labor, accelerating real wages, gradually modifying the relative shortage of other factors), led at the time to a growth in direct foreign investment, and exposure to external competition which forced Mexican industrialists to introduce technological changes and to accelerate productivity, maximizing those modes of growth in national income and well-being.

The commercial opening was effected with amazing fervor and dynamism. During the epoch of the development stabilization (1958-1970), 57.2% of the imports in value were subject to import duties: 74.1% of imports in the decade 1971-1980 were subject to tariffs whereas in 1989 only 14.1% were. While in 1989 only 14.1% of imports were subject to licensing, the percentage was reduced to 4.7% by 2004. Meanwhile, the weighted tariff average in 1981 was 18.3%, which fell to 6.1% in 1988, and 3.7% in 2004.

Simultaneously, the government proceeded to dismantle the instruments it used to directly intervene in the economy, both in the general economy and in specific sectors. Federal investment was reduced of 10.4% of GNP in 1982 (down from 12.4% in 1981), to 4.9% in 1988 and to 3.1% in 2004; and public spending in the sectoral economy (promoting energy, agriculture and manufacturing) was reduced from 11.9% of GNP in 1982 to 8.7% in 1988 and 4.7% in 2004.

In the meantime, the economic policy reforms contemplated by the Washington Consensus were also applied, as Williamson noted with approval. From an historical perspective, this was a radical change to the strategies used to stimulate development in Mexico over the previous 50 years. From the 1930s, especially during the government of President Lazaro Cárdenas, development had involved intervention in the relevant markets (normally prudent, except during the 1970s). The State directly and actively promoted development, by means of regulations and investments in foreign trade and internal market in basic goods and services. It was a direct investor in strategic areas, and a promoter of social benefits though labor and agrarian laws, and through social institutions involving education, basic health and social services.

The economic and social ideology of the Mexican Revolution, as interpreted by the Social Contract of 1917, had assigned these functions to the State, rejecting the then prevailing ideology of laissez-faire, laissez-passer. By contrast, the new strategy of the Washington Consensus is based in transferring substantial economic to the market, gradually assigning to private agents those functions previously assigned to the State.

It was hoped that this new strategy would “restore sustained growth”. Appraising growth under the new assumptions, compared with growth under the old economic model would be “the proof of the success of economic reform” (Williamson, op. cit.).

Nevertheless, after more than two decades of conversion, making our country an enormous experimental laboratory of Washington Consensus dogmas, the Promised Land of elevated growth rates is glaringly absent. The real results of the neoliberal model contrast negatively with those observed under the discarded previous economic model.

Under the Keynsian-cepalin model, which can, without abuse, be used to describe the economic model of the Mexican Revolutionary era, the Gross National Product (GNP) grew 5.9 times (1,592.7%) during period 1935-1982, with an annual growth rate averaging 6.1% annually, implying a 348% per capita increase in the GNP averaging 3.2% annually.

By contrast, under the neoliberal model based on ten-years of Washington Consensus GNP has only grown 0.65 times (65.1%) in the period 1983-2004. The annual growth rate is 2.3%, an accumulated growth of only 12.1% per capita increase in GNP, an average rate of only 0.5% annually.

Consequently, the accumulation of investment capital in productive activity has been dramatically lower under the neoliberal model. During the Mexican Revolutionary years, strategic economic investment in fixed capital investments (machinery, equipment and constructions) incremented 1,067.5% in period 1941-1982, an annual growth rate of 6%.

In contrast, during the 22 year neoliberal experiment, gross investment by inhabitant in 2004 was only 5.9 percent greater than what it was in 1982, giving a average annual growth rate of barely 0.3%

Finally, under the model of the Mexican Revolution, the spending power of the minimum wage incremented 96.9% from 1935-1982; under the neoliberal model, however, the minimum wage lost 69.8% of its purchasing power. That is, wages have deteriorated by a third of their effective power since 1982.

Given the objective results of the Washington Consensus in Mexico, the big question for our country is whether to fanatically persevere in applying the ten-year “miracle program” or to make deep changes in our economic strategy, and to find our own way towards development, maintained with fairness

José Luis Calva is a researcher at UNAM (National Autonomous University of México) Instituto de Investigaciones Económicas

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