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Mexico - ECONOMY




Mexico - The Economy

Mexico

FROM THE 1940s UNTIL THE MID-1970s, the Mexican economy enjoyed strong growth averaging more than 6 percent, single-digit inflation, and relatively low external indebtedness. These conditions all began to change during the 1970s. Expansionary government policies generated higher inflation and severe external payments problems while failing to produce sustained growth. Government spending outpaced revenues, generating steep budget deficits and increased external indebtedness. Low real interest rates also discouraged domestic saving.

A brief financial and economic crisis in 1976 signaled the need to address the economy's fundamental problems, but subsequent petroleum discoveries reduced incentives for reform and postponed the inevitable day of reckoning. The government expanded its debt-financed spending in the late 1970s in anticipation of continued low interest rates and high oil revenue. It also maintained a highly overvalued peso (for value of the peso--see Glossary), aggravating balance of payments problems, undermining private-sector confidence, and encouraging capital flight.

External conditions turned sharply against Mexico in the early 1980s, producing a deep recession that forced a fundamental change in the country's decades-old development strategy. Higher interest rates and falling oil prices combined with rising inflation, massive capital flight, and an unserviceable foreign debt to provoke an economic collapse. Lacking access to international capital markets, the government of Miguel de la Madrid Hurtado (1982-88) had to generate huge nonoil trade surpluses to restore macroeconomic balance. Import volume fell sharply at the expense of fixed investment and consumption. As a result of the government's stringent economic stabilization program, the fiscal deficit was eliminated, international reserves rebuilt, and export growth restored, but at the cost of lower real wages and extensive unemployment. Economic output remained flat between 1983 and 1988, and inflation remained high, reaching more than 140 percent in 1987. Real exchange-rate depreciation boosted the country's debt-to-gross domestic product (GDP--see Glossary) ratio by almost 30 percentage points between 1982 and 1987.

To control persistently high inflation and restore growth and international competitiveness, the government pursued a major policy reorientation in the late 1980s. It reduced state involvement in economic production and regulation and integrated Mexico more fully into the world economy. An anti-inflation plan was introduced in late 1987 under which the government, the private sector, and organized labor agreed to limit wage and price increases. In 1989 the government reached agreement with its external creditors on extensive debt restructuring and reduction.

In an effort to restore self-sustaining growth, the administration of Carlos Salinas de Gortari (1988-94) boosted investment as a share of GDP. It also accelerated the privatization of state-owned productive enterprises, both to raise state revenue and to promote economic restructuring and modernization. The government eased foreign investment regulations, stabilized the currency, deregulated the prices of most goods, and enacted extensive trade liberalization measures, including the reduction or elimination of import barriers and the pursuit of free-trade agreements with Mexico's trading partners, especially the United States.

The Salinas government allowed the currency to become increasingly overvalued during 1994, despite mounting trade and current account deficits resulting from trade liberalization and economic growth. It kept real interest rates high to ensure sufficient inflows of foreign (mainly short-term portfolio) investment to cover the current account deficit. During 1994 the government treasury issued a large number of dollar-denominated bonds (tesebonos ) to reinforce its capital position.

By the end of 1994, the almost total disappearance of Mexico's international reserves made the government's exchange-rate policy no longer tenable. The new administration of President Ernesto Zedillo Ponce de Leon was forced in December 1994 to devalue the new peso (for value of the new peso--see Glossary), despite promises to the contrary. The government's mismanaged new peso devaluation cost the currency nearly half of its value and the government much of its credibility and popular support. Inflation and interest rates rose sharply in subsequent weeks, throwing millions of Mexicans out of work and putting many consumer goods beyond the reach of the middle class, to say nothing of the impoverished majority. Public and private investment plummeted, and Mexico entered its worst economic recession since the 1930s. By early 1996, however, the economy had begun to recover, as capital inflows increased and most productive sectors registered positive growth rates.

Mexico

Mexico - Growth and Structure of the Economy

Mexico

Early Years

The Mexican wars of independence (1810-21) left a legacy of economic stagnation that persisted until the 1870s. Political instability and foreign invasion deterred foreign investment, risk-taking, and innovation. Most available capital left with its Spanish owners following independence. Instead of investing in productive enterprises and thereby spurring economic growth, many wealthy Mexicans converted their assets into tangible, secure, and often unproductive property.

The seeds of economic modernization were laid under the restored Republic (1867-76) (see The Restoration, 1867-76, ch. 1). President Benito Ju�rez (1855-72) sought to attract foreign capital to finance Mexico's economic modernization. His government revised the tax and tariff structure to revitalize the mining industry, and it improved the transportation and communications infrastructure to allow fuller exploitation of the country's natural resources. The government let contracts for construction of a new rail line northward to the United States, and it completed the commercially vital Mexico City-Veracruz railroad, begun in 1837. Protected by high tariffs, Mexico's textile industry doubled its production of processed items between 1854 and 1877. But overall, manufacturing grew only modestly, and economic stagnation continued.

During the Porfiriato (1876-1910), however, Mexico underwent rapid and sustained growth, and laid the foundations for a modern economy. Taking "order and progress" as his watchwords, President Jos� de la Cruz Porfirio D�az established the rule of law, political stability, and social peace, which brought the increased capital investment that would finance national development and modernization. Rural banditry was suppressed, communications and transportation facilities were modernized, and local customs duties that had hindered domestic trade were abolished.

Revolution and Aftermath

The Mexican Revolution (1910-20) severely disrupted the Mexican economy, erasing many of the gains achieved during the Porfiriato. The labor force declined sharply, with the economically active share of the population falling from 35 percent in 1910 to 31 percent in 1930. Between 1910 and 1921, the population suffered an overall net decline of 360,000 people. The livestock supply was severely depleted, as thousands of cattle were lost to the depredations of rival militias. Cotton, coffee, and sugarcane went unharvested as workers abandoned the fields either to join or flee the fighting. The result was a precipitous drop in agricultural output. The disruption of communications and rail transportation made distribution unreliable, prompting further reductions in the production of perishable goods. As agricultural and manufacturing output declined, black markets flourished in the major cities. The banking system was shattered, public credit disappeared, and the currency was destroyed. The mining sector suffered huge losses, with gold production falling some 80 percent between 1910 and 1916, and silver and copper output each declining 65 percent.

The Great Depression

The Great Depression brought Mexico a sharp drop in national income and internal demand after 1929, challenging the country's ability to fulfill its constitutional mandate to promote social equity. Still, Mexico did not feel the effects of the Great Depression as directly as some other countries did.

In the early 1930s, manufacturing and other sectors serving the domestic economy began a slow recovery. The upturn was facilitated by several key structural reforms, notably the railroad nationalization of 1929 and 1930, the nationalization of the petroleum industry in 1938, and the acceleration of land reform, first under President Emilio Portes Gil (1928-30) and then under President L�zaro C�rdenas (1934-40) in the late 1930s. To foster industrial expansion, the administration of Manuel �vila Camacho (1940-46) in 1941 reorganized the National Finance Bank (Nacional Financiera--Nafinsa), which had originally been created in 1934 as an investment bank.

During the 1930s, agricultural production also rose steadily, and urban employment expanded in response to rising domestic demand. The government offered tax incentives for production directed toward the home market. Import-substitution industrialization (see Glossary) began to make a slow advance during the 1930s, although it was not yet official government policy.

Postwar Economic Growth

Mexico's inward-looking development strategy produced sustained economic growth of 3 to 4 percent and modest 3 percent inflation annually from the 1940s until the late 1960s. The government fostered the development of consumer goods industries directed toward domestic markets by imposing high protective tariffs and other barriers to imports. The share of imports subject to licensing requirements rose from 28 percent in 1956 to an average of more than 60 percent during the 1960s and about 70 percent in the 1970s. Industry accounted for 22 percent of total output in 1950, 24 percent in 1960, and 29 percent in 1970. The share of total output arising from agriculture and other primary activities declined during the same period, while services stayed constant. The government promoted industrial expansion through public investment in agricultural, energy, and transportation infrastructure. Cities grew rapidly during these years, reflecting the shift of employment from agriculture to industry and services. The urban population increased at a high rate after 1940 (see Urban Society, ch. 2). Growth of the urban labor force exceeded even the growth rate of industrial employment, with surplus workers taking low-paying service jobs.

In the years following World War II, President Miguel Alem�n Vald�s's (1946-52) full-scale import-substitution program stimulated output by boosting internal demand. The government raised import controls on consumer goods but relaxed them on capital goods, which it purchased with international reserves accumulated during the war. The government progressively undervalued the peso to reduce the costs of imported capital goods and expand productive capacity, and it spent heavily on infrastructure. By 1950 Mexico's road network had expanded to 21,000 kilometers, of which some 13,600 were paved.

Mexico's strong economic performance continued into the 1960s, when GDP growth averaged about 7 percent overall and about 3 percent per capita. Consumer price inflation averaged only 3 percent annually. Manufacturing remained the country's dominant growth sector, expanding 7 percent annually and attracting considerable foreign investment. Mining grew at an annual rate of nearly 4 percent, trade at 6 percent, and agriculture at 3 percent. By 1970 Mexico had diversified its export base and become largely self-sufficient in food crops, steel, and most consumer goods. Although its imports remained high, most were capital goods used to expand domestic production.

Deterioration in the 1970s

Although the Mexican economy maintained its rapid growth during most of the 1970s, it was progressively undermined by fiscal mismanagement and a resulting sharp deterioration of the investment climate. The GDP grew more than 6 percent annually during the administration of President Luis Echeverr�a �lvarez (1970-76), and at about a 6 percent rate during that of his successor, Jos� L�pez Portillo y Pacheco (1976-82). But economic activity fluctuated wildly during the decade, with spurts of rapid growth followed by sharp depressions in 1976 and 1982.

Fiscal profligacy combined with the 1973 oil shock to exacerbate inflation and upset the balance of payments. Moreover, President Echeverr�a's leftist rhetoric and actions--such as abetting illegal land seizures by peasants--eroded investor confidence and alienated the private sector. The balance of payments disequilibrium became unmanageable as capital flight intensified, forcing the government in 1976 to devalue the peso by 45 percent. The action ended Mexico's twenty-year fixed exchange rate.

Although significant oil discoveries in 1976 allowed a temporary recovery, the windfall from petroleum sales also allowed continuation of Echeverr�a's destructive fiscal policies. In the mid-1970s, Mexico went from being a net importer of oil and petroleum products to a significant exporter. Oil and petrochemicals became the economy's most dynamic growth sector. Rising oil income allowed the government to continue its expansionary fiscal policy, partially financed by higher foreign borrowing. Between 1978 and 1981, the economy grew more than 8 percent annually, as the government spent heavily on energy, transportation, and basic industries. Manufacturing output expanded modestly during these years, growing by 9 percent in 1978, 9 percent in 1979, and 6 percent in 1980.

This renewed growth rested on shaky foundations. Mexico's external indebtedness mounted, and the peso became increasingly overvalued, hurting nonoil exports in the late 1970s and forcing a second peso devaluation in 1980. Production of basic food crops stagnated, forcing Mexico in the early 1980s to become a net importer of foodstuffs. The portion of import categories subject to controls rose from 20 percent of the total in 1977 to 24 percent in 1979. The government raised tariffs concurrently to shield domestic producers from foreign competition, further hampering the modernization and competitiveness of Mexican industry.

1982 Crisis and Recovery

The macroeconomic policies of the 1970s left Mexico's economy highly vulnerable to external conditions. These turned sharply against Mexico in the early 1980s, and caused the worst recession since the 1930s. By mid-1981, Mexico was beset by falling oil prices, higher world interest rates, rising inflation, a chronically overvalued peso, and a deteriorating balance of payments that spurred massive capital flight. This disequilibrium, along with the virtual disappearance of Mexico's international reserves--by the end of 1982 they were insufficient to cover three weeks' imports--forced the government to devalue the peso three times during 1982. The devaluation further fueled inflation and prevented short-term recovery. The devaluations depressed real wages and increased the private sector's burden in servicing its dollar-denominated debt. Interest payments on long-term debt alone were equal to 28 percent of export revenue. Cut off from additional credit, the government declared an involuntary moratorium on debt payments in August 1982, and the following month it announced the nationalization of Mexico's private banking system.

By late 1982, incoming President Miguel de la Madrid had to reduce public spending drastically, stimulate exports, and foster economic growth to balance the national accounts. Recovery was extremely slow to materialize, however. The economy stagnated throughout the 1980s as a result of continuing negative terms of trade, high domestic interest rates, and scarce credit. Widespread fears that the government might fail to achieve fiscal balance and have to expand the money supply and raise taxes deterred private investment and encouraged massive capital flight that further increased inflationary pressures. The resulting reduction in domestic savings impeded growth, as did the government's rapid and drastic reductions in public investment and its raising of real domestic interest rates to deter capital flight.

Mexico's GDP grew at an average rate of just 0.1 percent per year between 1983 and 1988, while inflation stayed extremely high (see table 7, Appendix). Public consumption grew at an average annual rate of less than 2 percent, and private consumption not at all. Total investment fell at an average annual rate of 4 percent and public investment at an 11 percent pace. Throughout the 1980s, the productive sectors of the economy contributed a decreasing share to GDP, while the services sectors expanded their share, reflecting the rapid growth of the informal economy. De la Madrid's stabilization strategy imposed high social costs: real disposable income per capita fell 5 percent each year between 1983 and 1988. High levels of unemployment and underemployment, especially in rural areas, stimulated migration to Mexico City and to the United States.

By 1988 inflation was at last under control, fiscal and monetary discipline attained, relative price adjustment achieved, structural reform in trade and public-sector management underway, and the preconditions for recovery in place. But these positive developments were inadequate to attract foreign investment and return capital in sufficient quantities for sustained recovery. A shift in development strategy became necessary, predicated on the need to generate a net capital inflow.

In April 1989, President Carlos Salinas de Gortari an-nounced his government's national development plan for 1989-94, which called for annual GDP growth of 6 percent and an inflation rate similar to those of Mexico's main trading partners. Salinas planned to achieve this sustained growth by boosting the investment share of GDP and by encouraging private investment through denationalization of state enterprises and deregulation of the economy. His first priority was to reduce Mexico's external debt; in mid-1989 the government reached agreement with its commercial bank creditors to reduce its medium- and long-term debt. The following year, Salinas took his next step toward higher capital inflows by lowering domestic borrowing costs, reprivatizing the banking system, and broaching the idea of a free-trade agreement with the United States. These announcements were soon followed by increased levels of capital repatriation and foreign investment.

After rising impressively during the early years of Salinas's presidency, the growth rate of real GDP began to slow during the early 1990s. During 1993 the economy grew by a negligible amount, but growth rebounded to almost 4 percent during 1994, as fiscal and monetary policy were relaxed and foreign investment was bolstered by United States ratification of the North American Free Trade Agreement (NAFTA). In 1994 the commerce and services sectors accounted for 22 percent of Mexico's total GDP. Manufacturing followed at 20 percent; transport and communications at 10 percent; agriculture, forestry, and fishing at 8 percent; construction at 5 percent; mining at 2 percent; and electricity, gas, and water at 2 percent (see fig. 9). Some two-thirds of GDP in 1994 (67 percent) was spent on private consumption, 11 percent on public consumption, and 22 percent on fixed investment. During 1994 private consumption rose by 4 percent, public consumption by 2 percent, public investment by 9 percent, and private investment by 8 percent.

However, the collapse of the new peso in December 1994 and the ensuing economic crisis caused the economy to contract by an estimated 7 percent during 1995. Investment and consumption both fell sharply, the latter by some 10 percent. Agriculture, livestock, and fishing contracted by 4 percent; mining by 1 percent; manufacturing by 6 percent; construction by 22 percent; and transport, storage, and communications by 2 percent. The only sector to register positive growth was utilities, which expanded by 3 percent.

By 1996 Mexican government and independent analysts saw signs that the country had begun to emerge from its economic recession. The economy contracted by a modest 1 percent during the first quarter of 1996. The Mexican government reported strong growth of 7 percent for the second quarter, and the Union Bank of Switzerland forecast economic growth of 4 percent for all of 1996.

Mexico

Mexico - Economy - Macroeconomic Management

Mexico

In the 1940s, Mexico adopted a state-led development strategy that relied on public-sector investment to integrate the national economy. Under the policy of "stabilizing development," the state promoted industrialization by encouraging import substitution, mobilizing domestic savings, and directing state credit toward priority investment projects. It followed conservative policies on interest and exchange rates in order to attract external capital to support industrialization. During the 1940s and 1950s, the government channeled public investment toward the agricultural sector, and especially into large-scale irrigation projects. During the 1960s, public spending was redirected toward expanding the nation's industrial capacity.

Although social infrastructure, such as medical and educational facilities, received some 25 percent of public spending, income distribution became steadily more unequal during the postwar decades, and the social needs of the rural poor went largely unaddressed. Popular acceptance of Mexico's post-1940 development strategy began to wane by 1970 as its inegalitarian consequences became clear. As public pressure for state redress of social needs rose, presidents Echeverr�a and L�pez Portillo turned to destructive fiscal policies that nearly bankrupted the state and contributed to Mexico's economic collapse in the early 1980s.

After taking power in 1970, Echeverr�a turned away from the policy of "stabilizing development" that had closely linked Mexico's economic fortunes to those of the private sector. By expanding the state's role in directing and regulating economic activity, Echeverr�a hoped to promote both equity and prosperity while easing political pressures on the state. Higher public spending was also intended to alleviate the social and political tensions that had found violent expression in the riots at the Plaza of the Three Cultures in Tlatelolco in 1968 and threatened continued Institutional Revolutionary Party (Partido Revolucionario Institucional--PRI) rule (see Reconciliation and Redistribution, 1970-76, ch. 1).

Echeverr�a's improvidence produced a growing fiscal imbalance, which he financed through foreign borrowing. Mexico's public-sector deficit rose sharply from 2 percent of GDP in 1970 to 7 percent by 1976. Under Echeverr�a, Mexico resorted for the first time to massive external borrowing to finance these deficits. Extensive oil discoveries in the mid-1970s gave Mexico access to almost unlimited foreign credits, allowing the government to contract huge loans to finance the fiscal and trade deficits. The share of public-sector spending financed by debt rose from 32 percent in 1971 to 50 percent by 1977. The looming fiscal crisis, together with the president's intemperate rhetorical assaults on the private sector, undermined business confidence and soured the investment climate. The government's determination to maintain a fixed exchange rate despite rising inflation undermined the competitiveness of domestic production, discouraged new investment, and encouraged capital flight.

By the mid-1970s, the balance of payments disequilibrium had become unmanageable. Inflation increased from 3 percent in 1969 to an annual average of 17 percent between 1973 and 1975. The fiscal deficit rose from 3 percent of GDP in 1971 to 10 percent in 1975. During those same years, the current account deficit rose from US$0.9 billion to US$4.4 billion, and the foreign public debt more than doubled from US$6.7 billion to US$15.7 billion. The private sector responded with massive capital flight, both to protect against the expected peso devaluation and to protest Echeverr�a's attacks on the private sector.

By 1976 the government could no longer ignore the crisis. Complying with International Monetary Fund (IMF--see Glossary) requirements for contingency lending and private-sector demands, the government curbed the expansion of state industry and public-sector spending, restricted credit, and forced the economy into recession. In August 1976, the government allowed the peso to float, ending more than twenty years of exchange-rate stability. The peso quickly depreciated by almost 40 percent against the dollar.

Although the discovery of massive new petroleum deposits in 1977 briefly alleviated the fiscal pressures weighing upon the government, it also led officials to abandon their newly acquired habits of fiscal restraint (see Recovery and Relapse, ch. 1). The fiscally expansionist Secretariat of Programming and Budget (Secretar�a de Programaci�n y Presupuesto--SPP), which had been established in 1977 and given responsibility for public investment planning, grew in influence at the expense of technocrats from the Central Bank and Treasury Ministry, who were more concerned with maintaining macroeconomic efficiency and stability.

The d�nouement of L�pez Portillo's expansionary policies came in mid-1981. International interest rates rose and oil prices fell. Capital flight accelerated as the government defended the increasingly overvalued peso through short-term external borrowing. Despite the warning signs, L�pez Portillo decided to postpone adjustment measures and maintain existing policy.

In late 1982, the incoming administration of President de la Madrid faced a raft of challenges: huge fiscal imbalances, unsympathetic creditor banks, an alienated private sector, and international institutions inexperienced in managing a global debt crisis (see The de la Madrid Sexenio , 1982-88, ch. 1). Mexico's public-sector deficit in 1982 amounted to 18 percent of GDP. Total public spending amounted to nearly 47 percent of GDP, compared with only 30 percent in 1977, while public-sector revenue rose during the same period from 24 percent of GDP in 1977 to only 30 percent in 1982. Both production and economic growth stagnated.

Despite having vowed to defend the peso "like a dog," in February 1982 the president allowed the dollar price of the peso to almost double to discourage foreign-exchange speculation. The exchange rate rose from more than twenty-six pesos per dollar in January 1982 to about forty-five three months later. In August of that year, the government announced three more dramatic devaluations of the peso and a ninety-day suspension of debt principal payments. It also began negotiations for bridge loans and rescheduling agreements with the United States treasury, the IMF, and private commercial banks. In September the government adopted full exchange controls and nationalized the domestic banking system in a mistaken effort to stem capital flight. In November the government concluded a rescheduling accord with the IMF, and in early 1993 it negotiated a US$10 billion rescue package with private banks.

In December 1982, de la Madrid announced what turned out to be his first stabilization package, the Immediate Economic Reorganization Program (Programa Inmediato de Reordenaci�n Econ�mica--PIRE). This two-stage program called for "shock" treatment in 1983 to restore macroeconomic balance, to be followed in 1984 and 1985 by a "gradualist" adjustment program to open the economy to market forces. The first phase was intended to restore price and financial stability by means of a sharp reduction in public spending and a steep peso devaluation. The government instituted a harsh austerity regime that held the growth in domestic spending far below the rise in total output.

De la Madrid's first stabilization package did not work as expected. The government had expected lower inflation and more realistic prices to produce strong economic growth by 1984. This did not take place. From early 1983 until mid-1984, the government adhered closely to the goals of a November 1982 agreement it had reached with the IMF. The agreement maintained highly restrictive fiscal and monetary policies and allowed wages to lag substantially behind inflation. The austerity measures and devaluations of 1983 eliminated both the fiscal and trade deficits, but at the cost of sharply reduced imports and a severe economic recession. Contrary to expectations, the inflation rate did not fall significantly, and voluntary private lending did not resume.

Increasingly concerned about Mexico's growing fiscal deficit and its failure to reach its economic targets, the IMF in September 1985 suspended disbursement of the loan it had approved in late 1982. This announcement led to another run on the peso and a new balance-of-payments crisis. The government reacted to the situation by imposing a series of devaluations and further harsh stabilization measures, including additional reductions in spending and domestic credit. Economic growth slowed and inflation surged, suggesting the failure of de la Madrid's first stabilization package.

In 1985 the Mexican government signaled a fundamental change in development strategy by reorienting economic policy toward trade liberalization and export promotion. It expected renewed export promotion to restore external balance and trade liberalization to restrain domestic prices by encouraging import competition. In July 1985, the government substantially reduced import licensing requirements and raised the share of total imports exempt from licensing. It compensated slightly for these measures by raising tariffs. The government also devalued the peso again, despite the inflationary consequences, to force previously protected domestic firms to become more competitive against imported goods.

In late 1986, the government cautiously relaxed credit to the private sector in an effort to ease the economy out of recession. External financing was again made available in 1987 following approval of a debt rescheduling plan proposed by United States Secretary of the Treasury James A. Baker III. The Baker Plan called for rescheduling some 83 percent of the US$52.2 billion of public-sector debt that Mexico had contracted prior to 1985. The debt would be repaid over a twenty-year period, with a seven-year grace period. Multilateral agencies agreed to lend an additional US$6 billion and commercial banks an additional US$7.7 billion, of which US$1.7 billion was contingency lending. The Baker Plan also provided for rescheduling some US$9.7 billion of private debt owed to commercial banks over a twenty-year period with seven years' grace. In all, the 1986 agreement provided Mexico some US$12.5 billion in new private and official credit.

After 1987 the government finally began to make progress against inflation. Endemic price instability had severely upset economic expectations, deterred much-needed investment, and hindered the country's economic recovery. In an effort to restore price stability, government policy makers decided in late 1987 to stop devaluing the peso at rates equal to or higher than the inflation rate. Even more important, in December 1987 the government forged a joint agreement with official leaders of the labor, peasant, and business sectors to restrain wages and prices. This accord, known as the Economic Solidarity Pact (Pacto de Solidaridad Econ�mica--PSE), promised to reduce Mexico's monthly inflation rate to 2 percent by the end of 1988.

The PSE required further reductions in public spending and credit, higher tax revenue, and a tighter monetary policy. All were intended to reduce the fiscal deficit and curb inflation. The new revenue measures included an increase in the value-added tax (VAT), a new personal income surtax, and elimination of tax exemptions. The government raised prices of public goods and services, and allowed interest rates to rise in order to promote saving and reduce capital flight. The PSE also included a structural adjustment component emphasizing trade liberalization and privatization of state enterprises.

The plan soon produced results. The inflation rate fell considerably, living standards recovered slightly, and economic growth resumed. Annual inflation fell from 159 percent in 1987 to 52 percent in 1988. The gradual recovery of Mexico's international reserves in 1989 and 1990 allowed the government to sustain a credible fixed exchange rate and finance the deterioration in the external account caused by the tariff reductions. Although President de la Madrid was himself not highly popular as he approached the end of his six-year term, his government had sufficient authority and institutional strength to enforce the wage restraints included in the PSE.

President Salinas announced in January 1989 a new version of de la Madrid's PSE, called the Pact for Economic Stability and Growth (Pacto para la Estabilidad y el Crecimiento Econ�mico--PECE), which he hoped would end Mexico's net capital outflow. Salinas's economic program received considerable external support (see President Salinas, ch. 1). In March 1989, Mexico and the United States reached agreement on a long-term plan to restructure Mexico's US$52.7 billion debt owed to commercial creditors. The plan, proposed by United States Secretary of the Treasury Nicholas F. Brady, was intended to attract new foreign investment, encourage return capital, reduce domestic interest rates, and foster higher growth.

In July 1989, Mexico signed an agreement in principle with an advisory committee representing its 500 or so international creditors. The final agreement was signed in February 1990 and went into effect the following month.

Mexico's public finances improved steadily during the early years of Salinas's presidency. Throughout the 1980s, the Mexican government had emphasized fiscal austerity while making little effort to raise tax revenue. This policy mix began to change under Salinas, as Mexican economic policy stopped holding domestic demand below output and began to tighten tax collection. The government broadened the tax base by reducing marginal tax rates, the maximum corporate and personal tax rates, and the number of personal income tax brackets. Between 1989 and 1992, the number of taxpayers increased by 45 percent. As a result in part of improved tax collection, Mexico went from a public-sector deficit of 9 percent of GDP in 1988 to a surplus of 2 percent of GDP in 1992, although the government began to relax fiscal policy thereafter.

In the wake of the currency collapse of late 1994, the government committed itself in March 1995 to reduce public spending by almost 10 percent in real terms; it raised the VAT from 10 percent to 15 percent, and it raised prices for fuel, electricity, and other publicly provided services. Although the anti-inflationary social pact among the government, business, and labor--the PECE--was not renewed in early 1995, the government announced in October 1995 a new pact with labor and business, the Alliance for Economic Recovery (Alianza para la Recuperaci�n Econ�mica--APRE), which established fixed rates of increase for wages and prices. Under the terms of the APRE, the government pledged to maintain a balanced budget during 1996. It also planned a 5 percent real reduction in current spending, as well as regular increases in prices of publicly provided goods and services. Unlike its predecessors, however, this measure was not called a "pact," and it included no provision for a crawling- peg exchange rate. The government's reductions in current spending and public investment during 1995 were especially severe because vastly higher interest rates had boosted the government's interest payments by more than 37 percent in real terms.

These spending reductions helped the government to move from a public-sector deficit of 1.7 billion new pesos in 1994 to a modest surplus of 815 million new pesos in 1995, the latter representing 0.05 percent of GDP. Public expenditure in 1995 totaled 424 billion new pesos, of which 72 billion new pesos (17 percent) went to interest payments, 67 billion (16 percent) to education, 65 billion (15 percent) to energy, and 62 billion (15 percent) to health and social security. For 1996 the government budgeted total public-sector revenue of 558 billion new pesos, of which 237 billion new pesos would come from taxation and 177 billion new pesos from state enterprises. It budgeted total net expenditures of 554 billion new pesos, of which the largest share would go to education, energy, and health and social security, as well as debt service.

Mexico

Mexico - Labor

Mexico

Mexico's workforce was estimated in the 1990 census at some 24.3 million. Workers constituted a relatively small share of the total population, in part because of the population's relative youth (38 percent were below the minimum working age of fourteen). Slightly more than half of the working-age population (those aged fifteen to sixty-four) had actually entered the formal labor market. In the early 1990s, an estimated 500,000 people entered the labor force each year, expanding the total workforce by some 3 percent annually.

In 1988 employers and the self-employed constituted 29 percent of the labor force, employees 56 percent, and unpaid family workers 15 percent. Agriculture, forestry, and fishing employed some 24 percent of the economically active population; manufacturing, mining, quarrying, and public utilities employed 22 percent; trade, hotels, and restaurants employed 19 percent; construction employed 5 percent; finance and real estate employed 5 percent; transportation and communications employed 4 percent; and 21 percent were engaged in other service work. About half of all manufacturing workers were employed in small and medium-size enterprises.

Partly because of high unemployment in the formal labor sector, the number of informal-sector workers swelled during the 1980s and early 1990s (see Income Distribution, ch. 2). These informal workers included some 900,000 street vendors in forty-five cities, with annual sales of about US$13 billion. The growth of the informal sector both reduced the state's tax revenue receipts and encouraged corruption among local officials.

Historically, real wages in Mexico have been subject to tacit understandings among government officials, the private sector, and labor union chiefs. During the 1940s and 1950s, these sectors forged an understanding whereby Central Bank and Treasury Ministry technocrats would control macroeconomic policy, business groups would refrain from open political opposition while gaining political access through officially recognized private-sector associations, and labor leaders would restrict real wage demands in exchange for additional patronage for distribution to workers. After falling sharply during the 1940s, real wages began to recover in the mid-1950s and continued to rise until the late 1970s, when the government responded to growing fiscal pressures by shifting resources away from the peasantry and the public sector. The government used its control of employment opportunities and the labor union movement to hold down wages throughout the 1980s in an effort to reduce inflation.

The average real wage in Mexico remained low in 1995, both in historical and international terms (see Income Distribution, ch. 2). The Confederation of Mexican Workers (Confederaci�n de Trabajadores Mexicanos--CTM) noted that the average worker's purchasing power in 1993 was only 65 percent of its 1982 level.

Unemployment rose sharply during the six months following the December 1994 new peso devaluation, then receded somewhat between August and December 1995. Open unemployment (according to the government's narrow definition) dropped from 8 percent to 5 percent during this period, although it subsequently increased to an average of 6 percent during the first quarter of 1996.

Although the government increased the minimum wage by 21 percent during 1995, the cost of living rose by more than 50 percent as a result of the currency collapse. In September 1995, the minimum wage was sufficient to cover only 35 percent of workers' basic necessities, compared to 94 percent in December 1987. The government's anti-inflation APRE program called for the minimum wage to increase in line with projected inflation of 21 percent. The government also pledged to boost employment through fiscal incentives to encourage private investment and tax credits for companies that increased their workforce above the average level for the first three quarters of 1995. It also planned to expand public training programs for workers and to maintain its temporary public works programs (such as rural road conservation, which was expected to employ 140,000 people, as well as other temporary work programs that would employ 700,000).

Partially to increase Mexico's domestic savings, the government proposed legislation in November 1995 to reform the country's pension system by allowing the creation of individual accounts managed by private financial institutions rather than by the government's Mexican Institute of Social Security (Instituto Mexicano de Seguro Social--IMSS). Until 1992 the IMSS had been solely responsible for managing the pension system.

Labor Legislation

Mexico's first comprehensive labor law was promulgated in 1931. The Federal Labor Act of 1970 authorizes the government to regulate all labor contracts and work conditions, including minimum wages, work hours, holidays, paid vacations, employment of women and minors, collective bargaining and strikes, occupational hazards, and profit sharing. The act sets the minimum employment age for children at fourteen years. Children fifteen years old can work but are restricted from certain jobs and have special legal protections and shorter working hours than adults. Medium and large commercial and manufacturing enterprises generally observe child labor laws strictly, although small shops and informal enterprises often do not. Although the law mandates a minimum wage, noncompliance ranges from 30 percent to 50 percent among employers of urban workers and reaches 80 percent in the countryside. Industrial safety laws often are loosely observed in practice, especially in the heavy industry and construction sectors.

The maximum legal workweek is forty-eight hours, and the maximum workday is eight hours. Industrial workers generally work the maximum number of hours per week, whereas office workers typically work forty or forty-four hours. The maximum workweek consists of either six eight-hour day shifts, six seven-hour night shifts, or six seven-and-a-half hour mixed shifts. Employers are required to pay double-time for overtime of up to three hours per day, and they cannot require workers to work overtime more than three times in one week. Each employee has the right to one free day per week, five paid holidays every year, and six to eight days of vacation during each full year of employment. Workers also are entitled to a share of their employers' annual profits.

Labor Unions

More than 90 percent of production workers in industrial enterprises employing more than twenty-five workers belong to labor unions. Relatively few craft or professional workers are organized. Because almost half of all Mexican workers were either unemployed or underemployed and therefore not organizable, Mexico ranked in the early 1990s as a country with a highly organized labor force. The plant or workplace union is the basic unit of Mexican labor organization. Local units (secciones ) are federated either into national unions (sindicatos ) or local, regional (intrastate), or state federations. Occasionally these federations join in nationwide confederations. The CTM is the country's largest labor organization. Its secretary general in 1994 was the long-serving Fidel Vel�squez. The CTM women's affiliate is the Workers' Federation of Women's Organizations (Federaci�n Obrera de Organizaciones Femininas). Other prominent union federations include the Regional Confederation of Mexican Workers (Confederaci�n Regional de Obreros Mexicanos), the Revolutionary Confederation of Mexican Workers and Peasants (Confederaci�n Revolucionaria de Obreros y Campesinos), the National Federation of Independent Unions (Federac�on Nacional de Sindicatos Independientes), and the Federation of Unions of Workers in the Service of the State (Federaci�n de Sindicatos de Trabajadores al Servicio del Estado). Most of these federations are affiliated with the Congress of Labor (Congreso del Trabajo), which represents 85 percent of all unionized workers.

Most Mexican labor unions have strong ties to the PRI. In the 1930s and 1940s, organized labor became an integral component of the regime. The official unions facilitated Mexico's dramatic postwar economic growth by accepting labor wage increases that did not exceed productivity gains, thus eliminating a major source of inflation. The unions also discouraged industrial conflict, which helped to foster a receptive climate for foreign investment. Unions close to the PRI--especially the CTM--used both coercion and bribery to restrain wage demands. The absence of meaningful union democracy made it hard for the union rank and file to press independently for wage increases. During the 1970s, an increasing number of militant union movements broke away from the control of traditional union bosses, winning considerable autonomy over hiring and firing decisions, internal labor market operations, line speeds, and other working conditions. The government's efforts during the 1980s to promote greater productivity and efficiency in both the public and private sectors led to the reversal of many of these gains. Industrial reorganizations and downsizing resulted in massive layoffs and numerous labor concessions to management regarding work practices.

President Salinas further weakened the traditional unions during his incumbency. In some cases, he forced unions to negotiate at the plant level rather than nationwide. Shortly after taking office, he weakened the official oil workers' union by having its powerful and corrupt chief, Joaqu�n Hern�ndez Galicia, arrested on corruption and murder charges. Salinas also undercut the 800,000-member official public schoolteachers' union, the National Union of Education Workers (Sindicato Nacional de Trabajadores de la Educaci�n), by transferring authority over education from the central government to the states. By doing so, he restricted the union's power by forcing it to negotiate separate contracts with each state government. The central government's ongoing privatization program eliminated hundreds of thousands of union jobs, and its 1993 decision to link future wage increases to productivity gains denied the CTM the role of bargaining with the government on wage increases for all workers. Instead, the CTM was limited to advising individual union locals as they negotiated new contracts with plant operators.

Mexico

Mexico - Financial System

Mexico

Banking System

Mexico has one of Latin America's most developed banking systems, consisting of a central bank and six types of banking institutions: public development banks, public credit institutions, private commercial banks, private investment banks, savings and loan associations, and mortgage banks. Other components of the financial system include securities market institutions, development trust funds, insurance companies, credit unions, factoring companies, mutual funds, and bonded warehouses.

The central bank, the Bank of Mexico (Banco de M�xico), regulates the money supply and foreign exchange markets, sets reserve requirements for Mexican banks, and enforces credit controls. It serves as the fiscal agent of the federal government, the issuing bank for the new peso, and a discount house for private deposit banks. It supervises the private banking sector through the National Banking Commission, and it provides funds for government development programs. Legislation in 1984 required the Bank of Mexico to limit its lending to the government to an amount fixed at the beginning of each year. To ensure continued control of inflation, the central bank was made autonomous in April 1994.

Mexico has a number of other official banks for agriculture, foreign trade, cooperatives, public works, housing, transportation, and the sugar industry, among other specialized purposes. The most important such development institution is the Nafinsa, which provides financial support for Mexico's industrialization program. Nafinsa provides medium-term financing and equity capital for productive enterprises, promotes Mexican investment companies, oversees the stock market and the issuance of public securities, and serves as the legal depository of government securities. By 1993 Nafinsa had divested itself of some of its interests, but it remained under state ownership. Mexico's other most important state development bank is the National Bank of Public Works and Services (Banco Nacional de Obras y Servicios P�blicos).

The private banking sector consists of more than 200 banks, which together have more than 2,500 branches. The proliferation of banking institutions resulted from regulations that prohibited any single bank from combining more than two banking functions. Mexico's two largest private banks are the Bank of Commerce (Banco de Comercio--Bancomer), comprising thirty-five affiliated banks with more than 500 branches, and the National Bank of Mexico (Banco Nacional de M�xico--Banamex). Development banks, known as financieras and organized by commercial banks in association with major industrial enterprises, provide most of the private sector's development financing.

In an effort to stem massive capital flight, President L�pez Portillo decreed the nationalization of the country's private banks in September 1982. In August 1983, the government authorized the return of up to 34 percent of the equity shares in these banks to the private sector, and it eliminated eleven banks and merged fifty others into twenty-nine national credit institutions in an effort to improve the banking system's efficiency. In March 1985, the government announced a further reduction in the number of commercial banks, from twenty-nine to eighteen.

The government took its first actual step toward reprivatizing the commercial banks in 1987, when it returned 34 percent of their capital to private investors in the form of nonvoting stock. In 1990 it allowed the sale to foreign investors of 34 percent of nonvoting shares in state-owned commercial banks. Reprivatization began in earnest in June 1991. By July 1992, all eighteen commercial banks had been sold to private owners, yielding more than US$12 billion. The privatization program dramatically increased the number of investors holding stock in Mexican commercial banks from just 8,000 on the eve of the 1982 nationalization to 80,000 in January 1993.

To improve the availability of credit, the government allowed the establishment of new domestic banks in Mexico in 1993, and the following year it allowed United States and Canadian banks to begin operating in Mexico. At the end of 1994, there were some fifty commercial banks in operation in Mexico, up from nineteen at the end of 1992. Mexico had forty-five brokerage houses, fifty-nine insurance companies, seventy-four leasing companies, sixty-five factoring houses, and forty-nine exchange houses.

Following the currency crisis of late 1994, the government was forced to raise interest rates sharply in order to protect the new peso by retaining existing short-term foreign investment and attracting new capital inflows. High interest rates during 1995 sharply increased the payments owed by Mexican individual and business borrowers, many of whom could not shoulder the increased burden. As a result, the share of nonperforming to performing loans held by Mexican banks rose significantly, creating a major crisis for the financial sector. During the first three quarters of 1995, the ratio of bad debts to the banking system's total loan portfolio increased from 8 percent to 17 percent. Partially as a result, the rate of growth in commercial bank financing of private-sector activities declined to just 1 percent during this period, compared with 19 percent a year earlier.

The interest rate increase also raised the cost to banks and the government of the various efforts to resolve the problem of banks' nonperforming loans. In late 1994, the government took over Banca Cremi, and a year later it was forced to take control of Inverlat. The government also agreed to assume problem loans held by Banamex and Bancomer.

In the wake of the financial sector crisis, the government introduced in mid-1995 a program for rescheduling bank loans using index-linked investment units. In September 1995, the government unveiled another emergency program of aid for bank debtors, which was to provide relief for 8 million bank debtors. By February 1996, 83 percent of eligible loans had been restructured under this program. By mid-1996, the cost of the government's various efforts to prevent a banking system collapse was estimated at 91 billion new pesos. The government held control of 25 percent of bank assets, despite having privatized the banking system only four years earlier. The government's efforts to restore the financial sector's stability were rewarded by a sharp drop in interest rates in late 1995 and early 1996.

Stock Exchange

Shortly after taking office, President de la Madrid allowed the establishment of private brokerage houses with wide latitude to conduct financial transactions in domestic capital markets. That action laid the foundation for the first significant stock market in Mexican history, the Mexican Stock Exchange (Bolsa Mexicana de Valores--BMV). Following several years of dynamic growth, the BMV's leading index fell sharply as a result of the October 1987 United States stock market crash. The BMV recovered slowly in 1988, then surged ahead from 1989 through 1991. By the early 1990s, the BMV had become one of the world's fastest growing stock exchanges. During 1991 the index of traded stocks rose 128 percent in new peso terms and 118 percent in United States dollar terms. Analysts attributed the stock market's buoyancy to increased confidence in the economy and to expectations of lower interest rates and approval of NAFTA.

In 1992, 199 companies were listed as trading on the stock exchange. A total of 11 trillion new pesos were traded, and the exchange had a total capitalization of US$139 billion and a price-to-earnings ratio of more than thirteen. The total value of stocks traded increased by US$191 billion between 1987 and 1993. Treasury bills, bank acceptances, and commercial paper were the most common instruments traded. At the end of 1993, Mexican investors held about 75 percent of the equities traded. Although the value of Mexican-owned stocks rose by about US$143 billion between 1987 and 1993, only 0.2 percent of all Mexicans had brokerage accounts at the end of 1992.

The BMV's market value stood at about US$200 billion at the end of 1993. Analysts attributed the rise partly to expectations of higher profits resulting from a 1 percentage point reduction in the corporate tax rate, lower energy prices for industrial users, and euphoria over the passage of NAFTA. Despite a setback induced by the January 1994 Zapatista rebellion in the state of Chiapas, the BMV continued its strong growth in early 1994. Beginning in March, however, the market was buffeted by a series of political shocks--including two high-profile political assassinations, revelations of high-level corruption in President Salinas's entourage, and continued unrest in Chiapas--that contributed to its high volatility throughout the rest of the year.

The stock market was further buffeted by the collapse of the new peso in early 1995, causing the stock index to fall to less than 1,500 points in February of that year. The main stock index gradually recovered to just under 3,000 points by the end of 1995 and had reached 3,300 by September 1996. Mexican stocks gained 24 percent in dollar terms during the first eight months of 1996. Mexico's stock market had a US$70 billion capitalization in September 1996, according to Morgan Stanley Capital International indices.

Exchange Rate

From December 1982 until November 1991, the Mexican peso had two rates of exchange against the United States dollar--the controlled or "official rate" and the "free rate." The controlled rate applied to income from most merchandise exports, to funds used by maquiladora (see Glossary) assembly industries for local expenditure other than fixed assets, to nearly all import payments, and to principal and interest payments and other credit expenses. The free rate applied to most other transactions, such as <> tourism and profit remittances.

In November 1991, the government eliminated all exchange controls, thereby unifying the various peso exchange rates. The regime freed the peso to float within a band, the bottom of which was fixed at 3,051 pesos per dollar and the top of which was devalued by 0.2 pesos per day. Renewed pressure on the peso forced the authorities in October 1992 to raise the average daily depreciation to 0.4 pesos per dollar, increasing the peso's annual rate of devaluation to less than 5 percent. The peso continued to appreciate in real terms, however, because Mexico's inflation rate exceeded that of the United States by some 8 percentage points. The government was reluctant to devalue the peso to the full extent of the inflation differential with the United States because it feared that a large devaluation would exacerbate domestic inflation and undermine public confidence in the stability of the government's macroeconomic policy. It preferred to compensate for the less competitive position of the peso by increasing productivity within Mexico. In January 1993, the government introduced the new peso, worth 1,000 of the old and divided into 100 centavos, to simplify foreign exchange.

Intense international demand for Mexican stocks and high-yielding two-year treasury certificates, known as cetes , kept the new peso at a stable level of 3.1 new pesos per dollar for most of 1993. Uncertainty about NAFTA's passage drove the new peso down to 3.3 per dollar in November 1993, although it soon rallied to 3.1 per dollar as interest rates rose and NAFTA's prospects of ratification appeared to improve. By late 1993, the capital influx had overvalued the new peso against the dollar by some 30 percent, leading some investors to avoid Mexican currency for fear that the new peso's overvaluation would compel the government to impose a large devaluation that would sharply reduce the dollar return of cetes . Some leading private-sector figures favored devaluation, expecting it to help reduce the trade deficit, Mexico's need for foreign capital, and thus interest rates.

Political considerations deterred the government from imposing a devaluation that would lower living standards, jeopardize investor confidence, and promote capital flight in the months prior to the August 1994 presidential and congressional elections. The slowdown of capital inflows exerted steady downward pressure on the new peso throughout the year. By late 1994, the government was drawing heavily on international reserves to prop up the new peso.

The almost complete disappearance of Mexico's reserves forced the new Zedillo government to bolster the currency's value. On December 20, 1994, the government raised the ceiling on the exchange rate band from 3.4 to 4.1 new pesos per dollar. However, continued pressure on the new peso, combined with mounting investor concern about the government's intentions, forced the administration two days later to let the currency float. The new peso ended 1994 at 5.3 per dollar. It continued to weaken during early 1995, as investors doubted the government's ability to repay the US$29 billion in short-term tesebono debt that would fall due during that year. In 1995 the exchange rate fell to 6.5 new pesos per dollar, and in January 1996 it stood at 7.4 new pesos per dollar.

The average monthly interest rate on twenty-eight-day cetes rose from 14 percent in 1995 to 49 percent in 1996. When the new peso came under heavy speculative pressure in late 1995, Mexico's monetary authorities reacted by raising interest rates sharply. Mindful of the need to restore investor confidence in Mexico's early economic recovery, the authorities allowed interest rates to fall at the end of 1995.

Mexico

Mexico - Agriculture

Mexico

Although nearly half of Mexico's total land area is officially classified as agricultural, only 12 percent of the total area is cultivated. In the early 1990s, only some 24 million hectares of a possible 32 million hectares were under cultivation.

Extensive irrigation projects carried out in the 1940s and 1950s greatly expanded Mexico's cropland, especially in the north. The government created areas of intensive irrigated agriculture by constructing storage dams across the valleys of the R�o Bravo del Norte (Rio Grande) and the rivers flowing down from the Sierra Madre Occidental, by controlling the lower R�o Colorado (Colorado River), and by tapping subterranean aquifers.

These water-control projects allowed Mexico to expand rapidly its total land area under cultivation. Between 1950 and 1965, the total area of irrigated land in Mexico more than doubled, from 1.5 million hectares to 3.5 million hectares. Despite a slowdown in the development of irrigated land after 1965, the total irrigated area had expanded to more than 6 million hectares by 1987. In the early 1990s, 80 percent of Mexico's cultivated land required regular irrigation. Because of the high cost of irrigation, however, the government has emphasized expanding production on existing farmland rather than expanding the area under irrigation.

Agricultural practices in Mexico range from traditional techniques, such as the slash-and-burn cultivation of indigenous plants for family subsistence, to the use of advanced technology and marketing expertise in large-scale, capital-intensive export agriculture. Government extension programs have fostered the wider use of machinery, fertilizers, and soil conservation techniques. Although corn is grown on almost half of Mexico's cropland, the country became a net importer of grain during the 1970s.

Mexico

Mexico - Land Tenure

Mexico

During the first decade of the twentieth century, peasants began to agitate for the return of communal and private lands seized by large-scale commercial producers since the 1870s. The desire to recover lost lands motivated many peasants to join the Revolution that began in 1910. On January 6, 1915, General Venustiano Carranza began the agrarian reform process by decreeing the immediate return to their original owners of all communal lands improperly seized since 1856. Carranza, who became president in 1917, also decreed that previously landless villages receive title to lands expropriated from private hacienda owners or to excess government land. These principles were later incorporated into Article 27 of the constitution of 1917.

The constitution established three different forms of land tenure in Mexico: private, public, and social. Social property was further subdivided into communal (in southern Mexico) and ejido (see Glossary) lands. Private lands were worked by owners, sharecroppers, and landless peasants; social lands were worked by colonos (settlers) or members of ejidos , known as ejidatarios . Although the constitution limited private holdings to 100 hectares, by the early 1990s Mexico had more than 40,000 farms of 101 hectares or larger and some 500 farms larger than 50,000 hectares. The constitution prescribed national sovereignty over all land, water, and subsoil mineral resources within national boundaries. It held private ownership of land to be a privilege rather than an absolute right, and it allowed the state to expropriate lands that it judged not to serve a useful social purpose (see Rural Society, ch. 2).

Article 27 and subsequent legislation established the ejido , or communal landholding, as the primary form of land tenure in Mexico (see Rural Society, ch. 2). Mexico's most extensive land redistribution took place during the presidency of L�zaro C�rdenas (1934-40). C�rdenas redistributed some 18 million hectares, twice as much as all his predecessors combined. By 1940 most of the country's arable land had been redistributed to peasant farmers, and approximately one-third of all Mexicans had benefited from the agrarian reform program (see C�rdenas and the Revolution Rekindled, 1934-40, ch. 1).

Agrarian reform sharply increased the proportion of Mexico's arable land held by minifundistas (smallholders). The share of total crop land held by large estates fell from 70 percent in 1923 to 29 percent by 1960, while that held by small farms of fewer than five hectares rose from 7 percent in 1930 to more than 33 percent by the 1980s. Between 1924 and 1984, the government expropriated and redistributed more than 77 million hectares of large-estate land, amounting to more than one-third of the national territory.

Declining agricultural production and mounting food imports moved President Salinas finally to address the root cause of the problem, the land tenure system. In 1991 Salinas announced a constitutional reform of the ejido and land distribution systems intended to overcome the low productivity resulting from the fragmentation of ejido farming units, of which 58 percent contained five hectares or fewer. A reform of land tenure rules in February 1992 gave Mexico's 3 million ejidatarios formal title to their land, enabling them to lease or sell their plots if a majority of members of their ejido agreed. No further land would be distributed, and joint ventures with private capital were legalized and encouraged. The reforms sought to reverse the trend toward smaller and less productive farming units and stimulate rural investment by allowing ejidatarios to use their holdings as collateral for raising capital. Implementation was hampered, however, by delays in conducting the necessary land surveys of ejidos prior to transfer of title, as well as by other factors.

Mexico

Mexico - Government Agricultural Policy

Mexico

In the years after World War II, Mexico followed a relatively moderate import-substitution policy. By striking a relative balance between industrialization and growth of agricultural output, the government was able to maintain a steady rate of agricultural output and exports and to restrict its external borrowing requirements for many years.

In an effort to resolve Mexico's long-standing conflict between promoting agricultural production for export and for domestic consumption, the government followed a dual strategy between 1940 and 1965; it promoted large-scale commercial agriculture while redistributing land to the rural poor. Government policy favored large producers because export agriculture provided foreign exchange needed to finance industrialization. Extensive public investment in irrigation projects primarily benefited northern areas, where large private farms were concentrated, while rain-fed subsistence farming predominated in the central, southwest, and lower Gulf of Mexico regions. Larger farms produced for the lucrative export and agro-industrial markets, while traditional farmers grew the less profitable staple crops. The government sold basic food crops through its National Company for People's Sustenance (Compa��a Nacional de Susistencias Populares--Conasupo) retail outlets, maintaining low purchase prices in order to maintain domestic political stability and justify low urban wages. Until the 1970s, Mexico was largely self-sufficient in basic staple crops.

Partly in response to changing market conditions, the production of staple commodities stagnated and then declined after 1965, while production of feed crops, livestock, and export products expanded. The agriculture sector's problems resulted partly from reduced public investment, as the government shifted resources to urban areas and failed to collect sufficient tax revenue. The government responded to declining staple output in 1971 with new agrarian reform legislation intended both to encourage production and to increase rural employment. The law authorized ejidos to move beyond basic crop cultivation into mining, forestry, fishing, agro-industry, commerce, and <>tourism.

Despite such measures, agricultural output failed to grow by more than 2 percent during the 1970s even though domestic food demand steadily increased as a result of population growth, growth in personal income resulting from the oil boom, and the government's provision of consumer subsidies for basic foods in order to improve the nutrition of the poor. The government raised producer prices and began to increase public spending in support of rain-fed production by small producers. Supply failed to keep pace with demand, however, and by 1980 Mexico had become a net food importer.

In 1980 President L�pez Portillo signaled a new emphasis on production of staple crops for domestic consumption over export-oriented agriculture by establishing the Mexican Food System (Sistema Alimentario Mexicano--SAM) (see Rural Society, ch. 2). This program sought to build a strong productive base for Mexican agriculture in order to reduce the country's dependence on food imports from the United States and restore self-sufficiency in basic staples. Its main beneficiaries included landless peasants and small farmers, mainly in rain-fed areas. Additionally, the program provided subsidized "baskets" of basic foods to some 19 million undernourished Mexicans. Production priorities and goals were set for each region: wheat would be grown in the north, corn in the southeast highlands, rice in the Gulf of Mexico region, and beans throughout. Conasupo's retail outlets would distribute the food. As a result of the debt crisis, the de la Madrid administration abolished SAM in 1982.

In the late 1980s, the Mexican government began to emphasize reform and modernization of the agricultural sector (see table 8, Appendix). President Salinas moved to reduce credit costs, root out corruption and inefficiency in agricultural institutions, and raise guaranteed prices for certain products. The government's increased investment in agriculture and its 1991 reform of the land tenure system helped to attract substantial new private investment to agriculture between 1990 and 1994.

Building upon its 1991 land reform measures, the Salinas administration announced in October 1993 the details of a new agricultural income support plan, the Program of Direct Rural Support or Procampo. Starting with the 1994 growing season, Procampo replaced current price supports for basic grains with direct cash payments of 12 billion new pesos (US$3.5 billion), representing an 83 percent increase over supports paid in 1993. About 70 percent of Mexico's cultivated land was subsidized. The program was initially funded from the fiscal surplus that had accumulated since the late 1980s.

Procampo was intended to improve agricultural planning decisions and promote capitalization of the rural sector. It marked the abandonment of Mexico's traditional policy of agricultural self-sufficiency in favor of a more market-oriented system in which individual producers rather than government bureaucrats would make basic production decisions. The program also sought to offset producer subsidies in other countries, reduce domestic commodity prices to levels consistent with world market prices, encourage crop diversification and conservation, boost the competitiveness of the domestic food processing sector, and encourage the modernization of Mexico's agricultural production and marketing channels.

Initial beneficiaries of Procampo included 3.3 million growers of corn, beans, sorghum, wheat, rice, soybeans, and cotton, which together accounted for 70 percent of Mexico's arable land. Barley and safflower producers were added to the program in autumn 1994. The new subsidies were based on the size and productivity of land holdings and were paid to both commercial and subsistence growers. The government claimed that the new program would cover some 2.5 million farmers who had not benefited from the previous price support system. The 800,000 farmers who did benefit from that system received both the price subsidies and the new Procampo subsidy for an eighteen-month transitional period.

In addition to price supports, growers of program crops received in the spring and summer of 1994 a general support payment of 330 new pesos per hectare, which rose to 350 new pesos per hectare in the fall and winter of 1994. Starting in April 1995, the Procampo support payments were gradually reduced in order to bring food prices into line with market conditions. Meanwhile, direct payments under the program increased, although at a slower rate than the decline in price supports. Total support to agricultural producers fluctuated between a minimum level ensuring adequate income for subsistence farmers and a maximum level that would guarantee profitability for commercial producers.

Funding for Procampo was expected to remain steady for ten years, until 2003, and then decline over an additional five years until the program's termination in 2008. Procampo's fifteen-year duration was intended to give farmers adequate time to adopt new technologies, develop producer associations with other farmers or private agribusiness firms, and rationalize land use. To encourage alternative crop production, Procampo would continue to provide area support payments to growers who decided to change from program crops to alternative crops or livestock, forestry, ecological, and aquaculture activities throughout the fifteen-year phase-out period.

Procampo's reform of agricultural prices was expected to encourage a shift away from production of corn and dry beans and toward wheat, soybeans, and other products such as fruits and vegetables. Its impact was likely to be greatest in northwestern and northeastern Mexico and the Baj�o region of west-central Mexico, where in the late 1980s and early 1990s many growers had switched from production of rice, cotton, sorghum, oilseeds, and wheat to the more profitable corn and dry beans. The direct payments were also expected to slow rural migration to cities and provide needed capital to impoverished subsistence farmers. Some government critics alleged that Procampo was intended to generate rural support for the ruling PRI.

During 1995 the government introduced a new agricultural support program, the Alliance for the Countryside (Alianza para el Campo), as an adjunct to its APRE program with labor and business. The alliance program presaged the devolution of responsibility for agricultural support to state governments, and it reinforced Procampo by expanding from ten to fifteen years the period during which direct cash subsidies would be paid to producers of various basic food crops. The new program also sought to improve credit flows to farmers from Banrural and other state agencies.

Mexico

Mexico - Grain Production

Mexico

Corn is the staple food of most Mexicans and is grown on about one-third of the country's cultivated land. Central Mexico is the main area of corn cultivation. The size of the corn harvest varies significantly with weather conditions. In the 1992-93 growing season, about 8 million hectares were planted in corn, and 16.5 million tons were harvested, a slight increase over the previous year's output of 16.3 million tons. In 1994 the corn harvest amounted to 19.2 million tons.

Until the late 1980s, Mexico enjoyed corn self-sufficiency during years when the harvest was good. In 1990, however, demand exceeded supply by some 3.3 million tons and was met by imports. Thereafter, Mexico's import needs steadily fell to 1.9 million tons, at a cost of US$178 million in 1991 and 1.1 million tons in 1992. In 1993 Mexico imported just 400,000 tons of corn, almost all from the United States.

Wheat became more widely cultivated than it had been before, as bread replaced corn tortillas among Mexican consumers. There is little correlation between poor harvests of wheat and corn because each has different climatic requirements. The total area sown in wheat declined from 1.1 million hectares in 1986 to 714,000 hectares in 1993. Mexico's wheat output averaged slightly more than 4 million tons annually during the 1980s, fluctuating from 3.2 million tons in 1981, to 3.7 million tons in 1988, and to 4.4 million in 1989. Wheat production fell slightly from 3.7 million tons in 1992 to 3.6 million tons in 1994. For most of the 1980s, domestic wheat output was barely sufficient to satisfy internal demand. Mexico's wheat import requirement steadily grew from 260,000 tons (at a cost of US$46 million) in 1990 to 1.4 million tons in 1993.

Because the climatic requirements of sorghum are similar to those of corn, its output has undergone similar weather-based fluctuations. Mexico's sorghum production declined from 5.4 million tons in 1992 to 3.9 million tons in 1994. The land area sown in sorghum declined by more than half between 1989 and 1993, from 1.3 million hectares to 600,000 hectares. Mexico's import requirements for sorghum (almost all from the United States) consequently rose between the mid-1980s and early 1990s. Mexico imported 3.0 million tons of sorghum (at a cost of US$362 million) in both 1990 and 1991. Its import needs rose further to 5.0 million tons in 1992, then declined to 2.8 million tons in 1993.

The total land area sown in rice decreased from 192,000 hectares in 1986 to 50,000 hectares in 1993. Mexico's domestic output of milled rice fell steadily from 615,000 tons in 1986 to 312,000 tons in 1989. After rising slightly to 431,000 tons in 1990, rice output fell again to 246,000 tons in 1992, then recovered to 371,000 tons in 1993. Mexico imported substantial quantities of rice from the late 1980s through the early 1990s. In 1993 the country imported 350,000 tons of rice.

Beans are a basic staple food for most poor Mexicans. Mexico's domestic production of dry beans fell from 1.4 million tons in 1991 to 719,000 tons in 1992, then recovered to 1.5 million tons in 1994. In 1991 Mexico imported 125,000 tons of beans. The 1991 bean harvest covered 1.9 million hectares, the largest area sown in beans since the early 1980s.

Mexico's barley output fell steadily from 581,000 tons in 1991 to 325,000 tons in 1994. About 450,000 hectares were sown in barley in 1993. Annual production of oats remained steady throughout the early 1990s at 100,000 tons, and some 100,000 hectares were sown in oats each year.

Mexico

Mexico - Fruits and Vegetables

Mexico

Fruit and vegetable production is concentrated in Mexico's irrigated northeast region and directed mainly to the United States winter market. In 1991 fruit and vegetable exports earned some US$935 million, 40 percent of Mexico's total export revenue. Fresh fruit and vegetables accounted for more of Mexico's agricultural export revenue than did coffee by the early 1990s. Processed food exports grew at an average annual rate of nearly 13 percent in the early 1990s.

Mexico produced 2.7 million tons of oranges in 1993, followed by apples (580,000 tons), table grapes (270,000 tons), tangerines (185,000 tons), grapefruit (118,000 tons), pears (32,000 tons), and raisins (13,000 tons). It also produced considerable quantities of bananas, mangoes, lemons, limes, watermelons, peaches, nectarines, plums, avocados, pineapples, and strawberries.

Mexico's output of fresh tomatoes declined from 1.7 million tons in 1990 to 1.4 million tons in 1993. During the same period,the total area harvested in tomatoes fell from 74,200 hectares to 58,500 hectares.

Mexico

Mexico - Other Crops

Mexico

Between 1990 and 1993, Mexico's soybean output fluctuated with the amount of land sown. For the 1992-93 growing season, 313,000 hectares were sown in soybeans, producing 578,000 tons. Mexico's soybean imports generally exceeded domestic production in the late 1980s and early 1990s, in some years by a wide margin. The country imported 2.1 million tons of soybeans in 1992 and 1993, mainly from the United States. In 1991 Mexico imported US$348 million worth of soybeans.

Between 1989 and 1993, Mexico's cottonseed output fell from 617,000 tons to 75,000 tons, and its total area harvested fell from 255,000 hectares to 42,000 hectares. In 1993 Mexico imported 180,000 tons of cottonseed. Peanut output averaged 104,000 tons between 1988 and 1992; the 1993 harvest of 80,000 hectares produced 108,000 tons of peanuts. Mexico produced 195,000 tons of copra and 10,000 tons of sunflower seed in 1993. Mexico also produced green chilies, green beans, and green peas.

Mexico's raw sugar industry was reorganized and modernized during the early 1980s. As a result, raw sugar production reached 40 million tons in the 1985-86 growing season, exceeding the 1982-83 harvest by 50 percent. Sugar output declined thereafter because of trade liberalization, price controls, and high credit costs. Bad weather in late 1989 and uncertainties resulting from privatization of state sugar mills also depressed production. Sugar output fell from 42 million tons in 1988 to 35 million tons in 1990, then recovered slightly to 40 million tons (from 530,000 hectares of sugarcane) in 1993. Declining domestic production forced Mexico to import large amounts of sugar to satisfy domestic demand. In 1991 it imported 1.3 million tons of sugar. Mexico's sugar harvest in 1994-95 was 4.3 million tons, and the following year's harvest was expected to rise to 4.4 million tons.

Coffee was introduced into Mexico during the nineteenth century. Mexican coffee is mainly the arabica type, which grows particularly well in the Pacific coastal region of Soconusco, near the Guatemalan border. In the early 1990s, the southern state of Chiapas was Mexico's most important coffee-growing area, producing some 45 percent of the annual crop of 275,000 tons. More than 2 million Mexicans grew coffee, most barely subsisting. Seventy-five percent of Mexico's coffee growers worked plots of fewer than two hectares. These small cultivators produced about 30 percent of the country's annual harvest; larger and more efficient farms produced the rest.

During the 1980s, coffee became Mexico's most valuable export crop. In 1985 coffee growers produced 4.9 million sixty-kilogram bags, and coffee exports earned US$882 million at the unusually high world price of US$0.90 per kilogram. Thereafter output fluctuated between 5.6 million bags and 4.4 million bags. As international coffee prices rose further, the government in 1988 encouraged coffee growers, especially in Chiapas, to increase output and expand the area under cultivation. It tried to increase production by offering easy credit to coffee growers and by converting forested land into ejidos for cultivation by poor coffee growers.

International coffee prices fell 50 percent between 1989 and 1993. Lower prices combined with the elimination of coffee subsidies to reduce the income of coffee growers by an estimated 65 percent. Lower prices reduced Mexico's export income from coffee to about US$370 million by 1991. They also depressed coffee production, which fell from 5.2 million bags in 1992 to 4.1 million bags in 1993.

Although cotton had lost its traditional overwhelming dominance of the export market by the 1990s, it remained--along with fresh fruits and vegetables--a major cash crop of Mexico's irrigated lands. Cotton output fell from some 1.8 million bales in 1973 to 1.4 million bales in 1989, and to 800,000 bales in 1990. The cotton industry's poor performance in the late 1980s and early 1990s resulted mainly from bad weather, low world prices, and depressed domestic demand resulting from slow growth in Mexico's textile industry. In 1992 the total area sown in cotton was 42,000 hectares, down sharply from 250,000 hectares in 1991. Mexico's cotton output in 1993 was just over 30,000 tons, down from nearly 181,000 tons in 1992. Export revenue from cotton fell from US$113 million in 1988 to US$77 million in 1991. By 1995-96, Mexico's cotton crop had recovered to 193 million tons, and the 1996-97 harvest was forecast at 266 million tons.

Mexico's cocoa production declined from 57,000 tons in 1988 to 43,500 tons in 1993. The total area harvested in tobacco rose from 18,700 hectares in 1992 to 34,000 hectares in 1993, while the total farm sales weight of tobacco fell from 38,250 tons in 1992 to 29,800 tons in 1993. Tobacco exports earned some US$44 million in 1991.

Mexico

Mexico - Livestock

Mexico

In the early 1990s, one-third of Mexican territory was officially designated as grazing land. These lands were located mainly in the north, where Herefords and other breeds were raised on huge cattle ranches for export to the United States, and in the southern, central, and southeastern states, where native beef cattle were raised. During the 1980s, higher domestic food demand encouraged more intensive raising of improved cattle breeds near urban areas for both dairy products and beef. In 1992 the Mexican government announced new measures to assist the meat industry, including deregulation of cattle growers and tighter controls on imported meat. The needs of the livestock industry also have encouraged more extensive cultivation of fodder crops on irrigated lands.

Mexico's livestock industry accounted for some 30 percent of the agriculture sector's annual growth, although animal husbandry contributed less than 1 percent to total GDP. The industry's weak performance in the late 1980s and early 1990s resulted from inadequate investment (which obstructed the adoption of intensive production techniques), high feed costs, low prices fixed by the government, poor weather conditions, epidemics of hoof-and-mouth disease, and fears of expropriation. Weak productivity has forced Mexico to become a net importer of beef.

Mexico's total cattle stock rose slightly from 30 million head in 1992 to 31 million head in 1993, and the total swine stock rose from 10 million head to 11 million head. The number of sheep held steady at 13 million head. Production of beef and veal was 1.7 million tons in 1993. Although lower domestic demand for red meat caused a 0.5 percent decline in total livestock output in 1991, beef exports held steady and earned US$358 million in 1991, compared with US$349 million in 1990. Output of lamb, mutton, and goat meat was 138,000 tons in 1993, and swine meat production was 870,000 tons.

Mexico's total flock of chickens rose from 282 million in 1992 to 285 million in 1993, while poultry meat output fell from 936,000 tons in 1992 to 923,000 tons in 1993. Mexico's chicken flock produced 20 billion eggs in 1993.

Mexico

Mexico - Fishing

Mexico

Mexico has some 11,500 kilometers of Pacific, Gulf of Mexico, and Caribbean coastline, and its inland waters cover more than 2.9 million hectares. The country's coastal fishing grounds offer a rich variety of fish and other seafood. The Pacific coast has thirty-one ports and produces nearly three-quarters of Mexico's total catch; the states of Sonora and Sinaloa alone account for 40 percent of the total catch. Mexico's Pacific fishing grounds produce mainly lobster, shrimp, croaker, albacore, skipjack, and anchovies, while its Gulf of Mexico and Caribbean waters produce shrimp, jewfish, croaker, snapper, mackerel, snook, and mullet. The Gulf of Mexico is an especially important source of shrimp. Certain species--such as shrimp, lobster, abalone, clam, croaker, grouper, and sea turtle--are reserved for the country's more than 284 fishing cooperatives, which together have more than 39,000 members. The state-owned Mexican Fisheries (Pesqueros Mexicanos) markets about 15 percent of the total catch. In 1989 the fishing subsector employed 288,000 people. The total fishing fleet grew from 48,000 boats in 1984 to 74,000 boats in 1989.

Until about 1970, the relative distance of urban markets from the coasts depressed commercial production of seafood. During the 1970s and 1980s, the government fostered the construction of new plants for freezing and processing fish. The national catch more than doubled after cooperatives were organized. The government's US$5 billion expansion program helped the fishing industry to increase output by more than 30 percent between 1985 and 1990. Despite these efforts, however, Mexico's catch accounted for less than 10 percent of the total catch taken from waters off Mexico's coasts by United States, Canadian, and Japanese boats.

In the late 1980s, Mexico's fishing output averaged a disappointing 1.4 million tons per year, equivalent to just 0.3 percent of GDP. Production increased from 1.1 million tons in 1983 to 1.6 million tons in 1990. Output fell slightly in 1991 as the United States and Europe embargoed Mexican tuna because of concerns about inadequate protection of dolphins. The Salinas administration's National Fishing Plan for 1990-94 promised higher public investment in the fishing industry, despite the government's stated intention to sell Mexican Fisheries to private owners.

In 1992 Mexico produced 251,500 tons of California pilchard (sardine), down from more than 600,000 tons in 1991. The yellowfin tuna catch rose from 116,400 tons in 1991 to 122,200 tons in 1992. Mexico produced 3,400 tons of Californian anchoveta in 1992, down from 12,100 tons in 1991. Output of marine shrimp and prawns declined from 70,600 tons in 1991 to 66,200 tons in 1992. Mexico exported two-thirds of its catch, especially frozen shrimp, prawns, and other shellfish from the Gulf of California and Bah�a de Campeche, mainly to the United States. Export earnings amounted to US$389 million in 1989. In 1992 Mexico produced 77,000 tons of cichlids and 88,100 tons of other freshwater fish.

Mexico

Mexico - Industry

Mexico

Manufacturing

In the early 1950s, the manufacturing sector eclipsed agriculture as the largest contributor to Mexico's overall GDP. Largely because of extensive import substitution, manufacturing output expanded rapidly from the 1950s through the 1970s to satisfy rising domestic demand. The value added by manufacturing rose from 20 percent of GDP in 1960 to 24 percent in 1970, and again to 25 percent by 1980. Manufacturing output grew at an annual average of 9 percent during the 1960s, and by a slightly lower annual rate of 7 percent in the 1970s.

This forty-year trend of manufacturing growth abruptly stopped and then reversed itself during the early 1980s. Sharp reductions in both exports and internal demand caused manufacturing output to fall by 10 percent between 1981 and 1983. After recovering briefly in 1985, manufacturing output fell again by 6 percent the following year. Production of consumer durables suffered especially, with the domestic electrical goods and consumer electronics goods sectors losing between 20 percent and 25 percent of their markets during the mid-1980s. Government industrial policies began to favor manufactured goods destined for the export market, in particular machinery and electrical equipment, automobiles and auto parts, basic chemicals, and food products (especially canned vegetables and fruit).

In the late 1980s, the manufacturing sector began to recover. In 1988 manufacturing output grew by a modest 4 percent. After expanding a robust 7 percent in 1989, manufacturing output steadily slowed; it grew by only 2 percent in 1992, as a result of weak export growth and falling domestic demand. After contracting by 2 percent in 1993, manufacturing output expanded by 4 percent in 1994. The most dynamic manufacturing subsectors in 1994 were metal products, machinery, and equipment (9 percent growth), followed by basic metals industries (9 percent growth). In 1994 the manufacturing sector accounted for 20 percent of the country's total GDP and employed about 20 percent of all Mexican workers.

Mexico's export base for manufactured goods is narrow, with three subsectors (vehicles, chemicals, and machinery and equipment) accounting for more than two-thirds of non-maquiladora foreign earnings. The value of Mexico's imports of manufactured goods rose sharply following trade liberalization, from US$11 billion in 1987 to US$48 billion in 1992 (US$62 billion including maquiladora imports). Increased foreign competition has seriously threatened many Mexican manufacturing enterprises, almost all of which are small and medium-sized companies employing fewer than 250 workers. In 1991 Mexico had 137,200 manufacturing enterprises, some 90 percent of which employed no more than twenty workers.

The principal industrial centers of Mexico include the Mexico City metropolitan area (which includes the Federal District), <"http://worldfacts.us/Mexico-Monterrey.htm">Monterrey, and Guadalajara. In the early 1990s, the capital area alone accounted for about half of the country's manufacturing activity, nearly half of all manufacturing employment, and almost one-third of all manufacturing enterprises. About one-third of formal-sector workers in the capital area were engaged in manufacturing. Manufacturers have been drawn to greater Mexico City because of its large and highly skilled work force, large consumer market, low distribution costs and proximity to government decision makers and the nation's communications system. In the early 1990s, the chemical, textile, and food processing industries accounted for half of all manufacturing activity in the Federal District, and metal fabrication accounted for another one-quarter. Heavy industry (including paper mills, electrical machinery plants, and basic chemical and cement enterprises) tended to locate in the suburbs of Mexico City, where planning and environmental restrictions were less rigorous.

By the late 1980s, more than two-thirds of all foreign investment in Mexico was concentrated in maquiladora zones near the United States border. In 1965 the government began to encourage the establishment of maquiladora plants in border areas to take advantage of a United States customs regulation that limited the duty on imported goods assembled abroad from United States components to the value added in the manufacturing process. The maquiladora zones offered foreign investors both proximity to the United States market and low labor costs. Most maquiladora plants were established in or near the twelve main cities along Mexico's northern border. Some of these enterprises had counterpart plants just across the United States border, while others drew components from the United States interior or from other countries for assembly in Mexico and then reexport.

The maquiladora sector grew nearly 30 percent annually between 1988 and 1993. By the latter year, more than 2,000 maquiladora businesses were in operation, employing 505,000 workers. These plants generated US$4.8 billion in value added during 1992. Their main activities included the assembly of automobiles, electrical goods, electronics, furniture, chemicals, and textiles. To increase their purchase of domestic materials, the Mexican government decided in December 1989 to exempt local sales to maquiladoras from the value-added tax and to let these enterprises sell up to half of their output on the domestic market. Nevertheless, almost all in-bond products have been exported to the United States.

In 1994 food processing, beverages, and tobacco products constituted the leading manufacturing sector in terms of value, accounting for about 26 percent of total manufacturing output and employing 17 percent of manufacturing workers. Food, beverage, and tobacco output expanded by an annual average of 3 percent between 1990 and 1994, largely as a result of export growth. In 1994 it expanded by less than 1 percent. In the early 1980s, well over 50 percent of Mexico's productive units were involved in food processing, and Mexico's beer industry was the world's eighth largest.

Metal products, machinery, and transportation equipment accounted for 24 percent of manufacturing GNP in 1994. The automobile subsector was among the most dynamic manufacturing sectors in the early 1990s and led among manufacturing exporters. Mexico's automobile manufacturers were led by Volkswagen, General Motors (GM), Ford, Nissan, and Chrysler. Ford expanded production by 33 percent during 1991, Chrysler by 17 percent, and GM by 10 percent. Volkswagen controlled 25 to 30 percent of the domestic automobile market, and Nissan another 15 to 20 percent. Mexican automobile exports earned US$6.1 billion in 1992, not counting maquiladora production, which earned an additional US$1.3 billion. Export revenue from passenger vehicle sales rose by 21 percent in 1993 and by 22 percent in 1994, while domestic sales fell by some 14 percent in 1993 and rose by less than 1 percent in 1994.

In 1983 the government encouraged the automobile industry to shift from import substitution to export production. It lowered national content requirements for exporters and required assemblers to balance imports of auto parts with an equivalent value of automobile exports. In 1990 the government eliminated restrictions on the number of production lines that automobile producers could maintain and allowed producers to import finished automobiles (although they were required to earn US$2.50 in automobile exports for every US$1 spent on imports).

In the early 1980s, automobile exports increased as domestic demand fell. Export growth leveled off in the early 1990s as the domestic market recovered. Growth of total vehicle output slowed from 21 percent in 1991 to 9 percent in 1992. In 1994 vehicle production totaled more than 1 million units, of which 850,000 were cars. Production fell by 16 percent between January and November 1995. During those months, exports rose by 37 percent to 700,000 units, while domestic sales fell by 70 percent, to 140,000 units.

Textiles, clothing, and footwear together accounted for 9 percent of manufacturing output in 1994 and employed about 7 percent of all manufacturing workers. Textile and clothing production stagnated throughout the 1980s because of low domestic demand, high labor costs, antiquated and inefficient technology, more competitive export markets (especially in Asia), and heavy import competition resulting from trade liberalization. In the early 1990s, the textile industry operated at just 60 percent of capacity. Import competition caused footwear and leather output to decline 4 percent annually between 1982 and 1989. In 1990 domestic footwear enterprises produced almost 200,000 pairs of shoes per week. In 1992 footwear and leather goods accounted for 4 percent of manufacturing GDP.

Non-maquiladora export earnings for textile, clothing, and footwear sales rose from US$499 million in 1990 to US$890 million in 1992. Imports also rose sharply to almost US$2 billion in 1992. The sector showed signs of strong recovery in late 1993, following its forced modernization.

The chemicals sector (including oil products, rubber, and plastics) accounted for 18 percent of manufacturing GDP in 1994. Its output increased by 5 percent during 1994. In 1990 this sector employed 130,000 workers. Although the chemical industry was the most important foreign-exchange earner in the manufacturing sector, its output fell far short of domestic demand. Exports of non-maquiladora chemicals and petrochemicals earned US$2.5 billion in 1992, but the country imported US$5.8 billion worth of chemicals and petrochemicals. The imbalance resulted partly from domestic price controls, inadequate patent protection, and high research and development costs. Chemicals and petrochemicals accounted for 72 percent of total non-maquiladora export revenues in 1992. The chemical industry slumped in early 1993, as sales fell by 10 percent, operating profits by 61 percent, and net profits by 59 percent.

Petrochemicals accounted for less than 2 percent of overall GDP in 1992. The state oil monopoly, Mexican Petroleum (Petr�leos Mexicanos--Pemex), dominated the country's more than 200 petrochemical companies, which together operated more than 700 plants. The petrochemical subsector enjoyed robust annual growth of 7 percent between 1982 and 1988, but output slowed thereafter. Pemex produced 18.5 million tons of petrochemicals in 1993, down from 19 million tons in 1992. In 1992 the Salinas government reduced the number of basic petrochemicals reserved for Pemex to just eight and lifted restrictions on foreign investment in "secondary" petrochemicals to improve the oil company's cost-effectiveness, raise the industry's productivity, and attract new private investment.

Although Mexico's pharmaceutical industry consisted of some 450 companies, the largest ten enterprises accounted for 30 percent of all sales in 1993. In the early 1990s, some fifty-six firms controlled three-quarters of pharmaceutical production. Nonmetallic minerals (excluding oil) accounted for 7 percent of manufacturing gross national product (GNP--see Glossary) in 1994. The subsector concentrated on production of cement, glass, pottery, china, and earthenware. Total cement output in 1993 was 27 million tons. Cement exports fell from 4.5 million tons in 1988 to 1.4 million tons in 1992 because of higher domestic demand and United States antidumping sanctions. A new cement plant came into operation in Coahuila in early 1993, and the expansion of two other plants in Hidalgo was completed.

Mexico's largest cement producer is the privately owned Mexican Cement (Cementos Mexicanos--Cemex). By 1994 Cemex had become the world's fourth largest cement company, with annual earnings of US$3 billion. In an effort to establish itself as a major multinational corporation, Cemex expanded its operations during the early 1990s into the United States and twenty-five countries in Europe, Asia, and Latin America.

The basic metals subsector (dominated by iron and steel) accounted for 6 percent of manufacturing GNP in 1994. Mexico's iron and steel industry is one of the oldest in Latin America, comprising ten large steel producers and many smaller firms. The industry is centered in Monterrey, where the country's first steel mills opened in 1903. Steel plants in Monterrey (privatized in 1986) and nearby Monclova accounted for about half of Mexico's total steel output in the early 1990s. Most of the rest came from the government's L�zaro C�rdenas-Las Truchas Steel Plant (Sicartsa) and Altos Hornos de M�xico (Ahmsa) steel mills, which were sold to private investors in 1991.

Export revenue from steel and steel products fell from US$1.03 billion in 1991 to US$868 million in 1992. Spurred by rising demand from the automobile industry, crude steel output rose 6 percent to 9 million tons in 1993. During the first half of 1993, output rose 10 percent over the same period in 1992, to 4 million tons. Production of semifinished steel rose 86 percent, reaching 573,000 tons, and rolled steel production expanded 5 percent to more than 2.6 million tons. Pipe production fell 13 percent to 174,400 tons. In 1993 Mexico was Latin America's second largest steel producer after Brazil, accounting for some 20 percent of Latin America's total steel production of 43 million tons.

Paper, printing, and publishing contributed about 5 percent of manufacturing output in 1994. Mexico produced almost 3 million tons of paper and 772,000 tons of cellulose in 1990. The country had some 760 publishing enterprises in 1990, 48 percent of which published books, 44 percent periodicals, and 8 percent both. These companies produced a total of 142 million books and 693 million periodicals. Trade liberalization hurt the domestic publishing industry in 1992, as imports rose to US$1.6 billion from US$1.3 billion in 1991. Exports of Mexican publications declined in value from US$232 million in 1991 to US$217 million in 1992.

Finally, wood products contributed 3 percent of manufacturing GDP in 1994. Although output of wood products fell in the late 1980s because of high investment costs and other adverse conditions in the primary forestry industry, it began to recover in 1993. Output of wood products increased by 2 percent during 1994.

Construction

The construction sector accounted for slightly more than 5 percent of GDP in 1994. In 1991 Mexico had about 18,000 registered construction companies that employed almost 1 million workers. In that year, heavy construction accounted for 44 percent of all construction, residential building 35 percent, and industrial construction 14 percent. Government efforts to promote private-sector investment in physical infrastructure projects (especially road building and new rental housing) helped to increase construction growth. Construction growth slowed from 7 percent in 1990 to 2 percent in 1991. It accelerated to 8 percent in 1992, but slowed again to 3 percent in 1993, partially as a result of continuing high interest rates, which discouraged private investment. In 1993 transport projects accounted for 29 percent of the value of production in the formal construction sector, the installation of water supplies accounted for 11 percent, and electricity and communications projects accounted for 9 percent.

Mexico

Mexico - Oil

Mexico

Although explorers drilled Mexico's first petroleum well in 1869, oil was not discovered until after the turn of the twentieth century. Commercial production of crude oil began in 1901. By 1910 prospectors had begun to define the Panuco-Ebano and Faja de Oro fields located near the central Gulf of Mexico coast town of Tuxp�n, and systematic explorations by foreign companies came to supersede the uncoordinated efforts of speculative prospectors. Mexico began to export oil in 1911.

Article 27 of the constitution of 1917 gives the Mexican government a permanent and inalienable right to all subsoil resources. The government's efforts to assert this right produced a lengthy dispute with foreign oil companies that was not resolved until the companies were nationalized in the late 1930s. The 1923 Bucarelli Agreements committed the United States and Mexico to regard titles held by foreign oil companies as concessions by the Mexican government rather than as outright ownership claims. In 1925 President Plutarco El�as Calles decreed that foreign oil companies must register their titles in Mexico and limited their concessions to a period of fifty years.

Despite disruption caused by the Revolution, Mexico's oil production peaked in 1921 at 193 million barrels (some 25 percent of world production), largely as a result of increased international demand generated by World War I. During much of the 1920s, Mexico was second only to the United States in petroleum output and led the world in oil exports. By the early 1930s, however, output had fallen to just 20 percent of its 1921 level as a consequence of worldwide economic depression, the lack of new oil discoveries, increased taxation, political instability, and Venezuela's emergence as a more attractive source of petroleum. Production began to recover with the 1932 discovery of the Poza Rica field near Veracruz, which became Mexico's main source of petroleum until the late 1950s.

In 1938 President L�zaro C�rdenas nationalized the petroleum industry, giving the Mexican government a monopoly in the exploration, production, refining, and distribution of oil and natural gas, and in the manufacture and sale of basic petrochemicals. Although C�rdenas offered compensation, United States oil companies pressured the United States government to embargo all imports from Mexico in order to discourage similar nationalizations in other countries. The boycott was in effect briefly, but the United States government soon pressured the oil companies to come to terms with Mexico as a result of President Franklin D. Roosevelt's Good Neighbor Policy and United States security needs arising from World War II. In 1943 Mexico and the oil companies reached a final settlement under which the companies received US$24 million (a fraction of the book value of the expropriated facilities) as compensation. Nevertheless, the oil nationalization deprived Mexico of foreign capital and expertise for some twenty years.

Mexico's oil output expanded at an average annual rate of 6 percent between 1938 and 1971. Production increased from 44 million barrels in 1938 to 78 million barrels in 1951. Domestic demand progressively exceeded output, and in 1957 Mexico became a net importer of petroleum products. Production rose to 177 million barrels by 1971 with the exploitation of new oil fields in the isthmus of Tehuantepec and natural gas reserves near the northeastern border city of Reynosa, but the gap between domestic demand and production continued to widen.

Extensive oil discoveries in the 1970s increased Mexico's domestic output and export revenues. In 1972 explorers discovered deep oil wells in the states of Chiapas and Campeche that showed huge reservoirs of petroleum extending for 200 kilometers northeast below the Bah�a de Campeche, and possibly in the opposite direction toward Guatemala. Almost every drilling operation conducted after 1972 struck oil. In 1973 oil production surpassed the peak of 190 million barrels achieved in the early 1920s. In 1974 Pemex announced additional petroleum discoveries in Veracruz, Baja California Norte, Chiapas, and Tabasco.

By 1975 Mexico's oil output once again exceeded internal demand, providing a margin for export. President L�pez Portillo announced in 1976 that Mexico's proven hydrocarbon reserves had risen to 11 billion barrels. They rose further to 72.5 billion barrels by 1983. L�pez Portillo decided to increase domestic production and use the value of Mexico's petroleum reserves as collateral for massive international loans, most of which went to Pemex. Between 1977 and 1980, the oil company received US$12.6 billion in international credit, representing 37 percent of Mexico's total foreign debt. It used the money to construct and operate offshore drilling platforms, build onshore processing facilities, enlarge its refineries, engage in further exploration, prove fresh reserves, and purchase capital goods and technical expertise from abroad. These investments helped to increase petroleum output from 400 million barrels in 1977 to 1.1 billion barrels by 1982. Between 1983 and 1991, Mexico's petroleum exports by volume remained roughly constant at 1.4 million barrels per day (bpd), while total production increased from 2.7 million bpd to 3.1 million bpd.

The oil sector's share of total export revenue fell sharply from 61 percent in 1985 to 38 percent in 1990 because of higher domestic demand and lower total output. The volume of exports fell from 1.4 million bpd in 1987 to 1.3 million bpd in 1990. Oil prices rose briefly to more than US$35 per barrel in 1990 as a result of loss of supplies from Iraq and Kuwait, and Mexico's oil export revenues rose significantly to US$10 billion before falling back some 15 percent in 1991. The volume of oil exports rose slightly to 1.4 million bpd in 1991, then held steady along with production in 1992, as the oil price fell to below US$15 per barrel.

By early 1993, both crude oil production and exports had begun to decline. The drop in exports resulted from both increased domestic demand and lower total production. For all of 1993, Mexico's oil exports averaged 1.3 million bpd, 2 percent less than in 1992. Exports fell even more sharply in terms of value--to US$7 billion--because world oil prices fell steadily during much of 1992 and 1993. In 1994 Mexico's revenue from oil exports was more than US$7 billion.

In 1995 the oil sector generated slightly more than 10 percent of Mexico's export income (down from almost 80 percent in 1982). The United States bought 54 percent of Mexico's crude oil exports in 1991, Western Europe bought 25 percent, and Japan bought 11 percent. In mid-1993, heavy Maya crude accounted for 67 percent of total oil exports, the lighter Isthmus crude accounted for 20 percent, and the high-quality Olmeca type accounted for 13 percent.

In 1995 Mexico was the world's sixth-largest producer of crude oil. In the Western Hemisphere, only the United States produced more oil than Mexico. Directly behind Mexico was Venezuela, which in 1992 produced an amount equal to 89 percent of Mexico's crude oil output. The oil sector's share of overall GDP rose slightly from 5 percent in 1985 to more than 6 percent by 1992. In 1993 petroleum provided nearly 30 percent of central government revenues. Oil output rose steadily from 2.5 million bpd in 1989 to 2.7 million bpd in 1991, partly in response to the Persian Gulf crisis. Production held steady in 1992, then began to decline in early 1993. Mexico consumed 61 million tons of oil equivalent in 1992. Its total petroleum consumption amounted to 1.8 million bpd in 1992.

For the first ten months of 1995, total mineral production (including oil) contracted by a modest 1 percent. For all of 1995, oil production fell to an average of 2.6 million bpd from 2.7 million bpd in 1994. However, oil output in the first quarter of 1996 increased by 6 percent over the first quarter of 1995 to an average of 2.8 million bpd.

In 1993 Pemex operated seven oil refineries with a total capacity of more than 1.5 million bpd, the eleventh largest in the world. Mexico's average annual oil refining capacity grew steadily from 63 million tons in 1983 to 84 million tons in 1990. The country's largest oil refineries in terms of refining capacity were those at Salina Cruz (330,000 bpd) and at Tula (320,000 bpd) in the state of Hidalgo. Other refineries were located at Cadereyta (235,0900 bpd refining capacity), Salamanca (235,000 bpd), Minatitl�n (200,000 bpd), Ciudad Madero (195,000 bpd), and Reynosa (9,000 bpd).

By the early 1990s, some 40 percent of Mexico's crude petroleum output was refined domestically. The government invested heavily to increase the capacity of existing refineries and construct new ones in order to retain within Mexico the maximum possible amount of value added in processing crude petroleum. In the early 1990s, financial difficulties prevented Pemex from expanding refinery capacity along with demand, forcing Mexico to consume more of its oil output internally and also to import oil. Petroleum imports rose from 2 billion liters in 1991 to almost 5 billion liters in 1992. Fuel oil imports rose from less than 3 million tons in 1991 to almost 4 million tons in 1992.

During the 1980s, Pemex constructed national pipeline distribution systems for crude and refined petroleum products and for natural gas. In 1989 an oil pipeline across the Tehuantepec isthmus opened to carry 550,000 bpd of Maya crude petroleum to Salina Cruz on the Pacific for export to the Far East. Two enormous petrochemical complexes were being built at Pajaritos and La Cangrejera in Veracruz to supply raw materials for manufacturing fertilizers, detergents, acrylic resins, polyester fibers, emulsifying agents, and other petroleum products.

In 1993 Mexico had the world's eighth largest crude petroleum reserves, amounting to some 5 percent of the world's total. Its proven crude oil reserves amounted to some 51 billion barrels in 1993, and it had potential reserves of some 250 billion barrels. The Gulf of Mexico contains approximately 56 percent of Mexico's proven reserves; 24 percent are located in the Chicontepec region, 15 percent are located in Tabasco and Chiapas, and the remainder are elsewhere. Mexico's reserves are sufficient to guarantee current production levels for fifty years.

Since the nationalization of the oil industry in 1938, the state-owned Pemex has monopolized the production and marketing of hydrocarbons. For decades the government tolerated Pemex's waste and inefficiency because the company produced nearly all public revenues. Problems mounted, however, as a result of Pemex's poor administration, low productivity, overstaffing, and corruption. By the late 1980s, Mexico's economic recovery had come to depend heavily on reform of the state oil sector.

After becoming president, Salinas moved swiftly to modernize and reorganize the oil industry. He began by breaking the power of the oil workers' union, which had contributed to Pemex's overall inefficiency by forcing the hiring of tens of thousands of unnecessary workers. In January 1989, Salinas had the union's notoriously corrupt chief, Joaqu�n Hernandez Galicia (nicknamed La Quina), arrested on weapons and murder charges. He was subsequently convicted and received a thirty-five-year jail sentence. Salinas then ordered Pemex to monitor and account for its internal finances. To reduce expenses, the company began massive employee layoffs, slashing its workforce by 94,000 (some 44 percent of the total payroll) by mid-1993.

In April 1992, natural gas from a Pemex pipeline leaked into the Guadalajara sewer system, triggering an explosion that killed more than 200 people. The tragedy underscored Pemex's bureaucratic unwieldiness and lack of public accountability. Following the explosion, Salinas accelerated the organizational restructuring of Pemex. The restructuring resulted in the company's division in 1992 into four subsidiaries: Pemex-Exploration and Production (E&P), Pemex-Refining, Pemex-Gas and Basic Petrochemicals, and Pemex-Petrochemicals. Each unit became a semiautonomous profit center, directing its own budget, planning, personnel, and other functions. The subsidiaries deal with each other on the basis of formal contracts and market-based transfer prices. The governing board of each subsidiary is composed entirely of public-sector officials.

Pemex's new focus on profitability and cost-cutting allowed the company to save US$50 million in 1990, US$70 million in 1991, and US$100 million in 1992. Moreover, Pemex reduced its total labor force from 210,000 workers in 1989 to 116,000 in 1992, with more dismissals expected later. A new collective contract permitted the company to seek the lowest bidder for maintenance, transport, slop oil disposal, and other work formerly reserved for the official oil workers' union. Pemex's new focus on efficiency and productivity also cleared the way for previously unthinkable foreign involvement in Mexico's oil sector. Several United States oil exploration companies received permission to drill under contract in Mexico, and foreign partnerships were authorized.

In August 1993, it became known that the government was considering proposals to allow private companies to buy, sell, and distribute imported gasoline, natural gas, and petrochemicals, and to invest in new pipelines. Although the government reiterated in 1992 its longstanding pledge not to denationalize the oil industry, some observers viewed the reorganization of Pemex as a move to improve the company's efficiency and profitability as a prelude to privatization. Denationalization would require amending the constitution of 1917, which mandated state ownership and exploitation of hydrocarbons.

During 1995 Pemex proceeded with its plans to divest its secondary petrochemicals plants and allow private investment in the storage, transportation, and distribution of natural gas. In late 1995, Pemex began to divest itself of sixty-one petrochemical plants.

In early 1996, the government unveiled its Program for the Development and Restructuring of the Energy Sector. The program estimates the minimum investment required by the petroleum sector by the year 2000 to be 250 billion new pesos (at 1995 prices). The private sector is expected to provide 49 billion new pesos of this amount. The plan is intended to increase Mexico's petroleum exports, improve its competitiveness in the international energy market, and contribute to more balanced regional development.

Mexico

Mexico - Tourism

Mexico

During the 1970s and 1980s, tourism generated more than 3 percent of Mexico's GNP and between 9 percent and 13 percent of its foreign-exchange earnings. Only petroleum generated more net foreign exchange. The number of arriving tourists rose steadily from more than 5 million in 1987 to 7 million in 1990, despite the peso's overvaluation during those years. The number of arrivals subsequently fell to about 6 million in 1991 and 1992 as the overvalued peso raised costs for United States visitors. Mexico had 7 million foreign arrivals in 1994, and tourism generated total revenue of US$4.2 billion.

Eighty-three percent of foreign visitors to Mexico in 1993 came from the United States, many of them from the border states for short visits. Eight percent of foreign visitors came from Europe, and 6 percent from other Latin American countries. In 1990 United States residents made some 70 million visits to Mexico's border towns, and Mexicans made 88 million visits to United States border towns. In 1984 visitors to Mexican border areas spent some US$1.3 billion, compared with US$2.0 billion spent by all tourists in the interior. By 1990 border visitors spent more than US$2.5 billion, while visitors to the interior spent approximately US$4.0 billion. In 1991 each foreign tourist spent an average amount of US$594. In 1992 Mexico had some 8,000 hotels and some 353,000 hotel rooms.

In the early 1990s, Mexico City was the most popular destination for foreign tourists, followed by Acapulco. In the mid-1970s, the official tourist development agency, Fonatur, began to promote new tourist areas, including Zihuatanejo, Ixtapa, and Puerto Escondido on the Pacific coast, and Canc�n on the Caribbean coast. In 1986 and 1987, work began on the new Pacific coast tourist resort of Huatulco. Mexico's tourist industry is particularly vulnerable to external shocks such as natural disasters and bad weather, international incidents, and variations in the exchange rate, as well as changes in national regulations. For instance, a 1985 earthquake that had an epicenter near Acapulco damaged many of Mexico City's central hotels. In September 1987, Hurricane Gilbert struck Canc�n, causing US$80 million worth of damage that took three months to repair.

<"http://accommodations-travelnow.com/latin-america/mexico/">Accommodations in Mexico

Mexico





CITATION: Federal Research Division of the Library of Congress. The Country Studies Series. Published 1988-1999.

Please note: This text comes from the Country Studies Program, formerly the Army Area Handbook Program. The Country Studies Series presents a description and analysis of the historical setting and the social, economic, political, and national security systems and institutions of countries throughout the world.


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