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THE EXHAUSTION OF NEO-LIBERALISM IN MEXICO

By Cliff DuRand To view the video go to http://vimeo.com/3910072  The text of the DuRand presentation follows:
March 11, 2009

The world is now in the midst of a catastrophic crisis of capitalism that is global in its reach.  The crisis of the 1970s had been fixed by a turn to global neo-liberal economic policies.  Now it is precisely those policies that have led to the present crisis and there is no new fix in sight.  This is what the countries of the global North are now discovering.  But the dead end of neo-liberalism has been apparent in Latin America for some time and has opened the way for the Left there to experiment with new alternatives. 

What I want to do today is give an overview of the failure of neo-liberalism in the one country of the global South that perhaps went the farthest in turning its society in that direction.  That country is Mexico.  And the policies that have reshaped the country are those that grew out of NAFTA.  Mexico is an ideal laboratory in which to observe the effects of corporate led neo-liberal globalization –both in its hayday, and now in its crisis.

First, a little historical context is needed.  In the early 1980s an external debt crisis swept through Latin America when the U.S. Treasury Department raised interest rates as a fix for the stagflation that had set in there.  In the ‘70s the banks had been awash with petrodollars and recycled them as loans to many developing countries -- among them Mexico.  But when interest rates shot up and the price of oil declined, Mexico found itself unable to even service its immense external debt.  It was on the verge of default when Treasury engineered a bailout (actually it was a bailout of the banks, not Mexico, since the money never even left the U.S.).  As part of the deal, the IMF imposed a Structural Adjustment Program (SAP) on Mexico that required it to

This was a drastic shift from the economic policies that had prevailed for decades.  Since the 1930s the development of the Mexican economy had been protected by import substitution industrialization (ISI) policies.  Following the example set by the industrialized countries of the North which had protected national capital against foreign competition, the Mexican state likewise favored the development of its own infant industry with protective tariffs and limits on foreign ownership.  It also sought to ensure a minimal level of well being of its population through agricultural subsidies and low prices for basic food stuffs, public provision of social services, etc.  All this was to change with Mexico’s debt crisis. 

There was a faction within the ruling political elite and its party, PRI, that was eager for such changes.  Headed by Harvard MBA Carlos Salinas and other technocrats schooled in neo-liberal economic thought, they pushed through the IMF reforms against the opposition from those in the PRI who upheld the principles of the Mexican Revolution as represented by Lazaro Cardenas.  And of course it was Salinas, who became President in the fraudulent 1988 election, who consolidated this neo-liberal turn with NAFTA.  These neo-liberal reformers constituted what the World Bank later called “an insulated technocratic elite” which the Bank said was an essential political condition needed to carry out such a transformation.

‘Neo-liberalism’ refers to a renewed form of an ideology that goes back to the late 18th and 19th centuries, long before ‘liberal‘ meant ‘progressive.’  The classic expression of the liberal ideology of the time is Adam Smith’s 1776 book The Wealth of Nations.  The core idea there is an insistence on the separation of the political sphere from the economic sphere.  An autonomous economic sphere is envisioned in which the market is supreme.  The market is conceived of as made up of individual actors who freely engage in exchanges based on self-interest.  Whether buyer or seller, each seeks to maximize their individual gain and enters into contractual agreements only if it is perceived to be to ones own advantage.  The market is then the mechanism for summing up individual goods, producing the maximum good for the greatest number.  This utilitarian calculus is performed through the invisible hand of the market a la Adam Smith.  There is no common good, there is only the sum of individual goods.

But in order for the market to work its magic it must be free of social, i.e. collective, interference.  A “free market” is one that is free of governmental action, which is seen as distorting the market and its outcomes.  The only actors allowed are individuals who are guided not by altruism, conscience or compassion, or even enlightened self-interest, but only by their own individual self-interest.  In this view the best government is the one that governs least, a minimalist state.  The only legitimate role for the state is to maintain or establish the conditions necessary for a market to operate.  This includes establishing a common currency and standard weights and measurers as well as enacting laws and accompanying institutions to protect private property and enforce contracts.  Allowed state action might even extend to the public provision of necessary infrastructure like roads, ports, utilities and communications facilities that require large lumps of investment but where the benefits are long term and socially dispersed so that costs cannot be easily captured.  But even here, the state should withdraw as much as and as soon as possible so that these facilities should be privatized.

Throughout, the underlying assumption is that the market is the sole effective means for integrating society and making the decisions that can determine its development.  

Broadly speaking, this was the predominant public ideology in the United States up until the collapse of capitalism in the Great Depression of the 1930s.  Out of that crisis a new public ideology was born, often called ‘welfare liberalism’ or sometimes ‘social liberalism.’  It recognized that the market is not always self-regulating and that there is a common good that can be promoted only through the collective action of the state.  To save capitalism from its breakdown, decisive state intervention into the market was necessary.

Neo-liberalism’ refers to a return to the earlier form of liberalism of the 19th century which occurred in Britain under Margaret Thatcher, in the U.S. under Ronald Reagan, and in Mexico under Carlos Salinas.  Only now it was in the context of a new era of capitalism known as globalization.  This marched onto the historical stage under the banner of “free trade.”  Free trade extended the neo-liberal principles beyond individual national economies to a developing global economy.  And it involved more than just trade in goods between countries.  It also involved free movement of capital across borders as the way was opened for investment from abroad and repatriation of profits.  Capital became hypermobile as it was freed up from national limits.  And the primary actor in this drama of globalization was the transnational corporation (TNC). 

For Mexico, globalization has meant opening up the country to penetration by these transnational corporations and abandonment of its earlier ISI, shifting to export oriented development (EOD) instead.  At the same time there has been a withdrawal of the state from the market and its role in providing for the welfare of those less well off.  Individuals and domestic businesses alike have been pushed into a market increasingly dominated by giant transnational corporations, while being given little social support from the state.  This is the brave new world of neo-liberal globalization.

The advocates of neo-liberal globalization promised that it would raise the living standards of people worldwide.  It would promote economic growth.  And a rising tide would lift all boats, those of rich and poor alike.  As we will see, the results have not fulfilled the promise.  The yachts of the rich have certainly risen to unprecedented heights, but the rowboats of the poor are sinking, and those of us in the middle are struggling to stay afloat as well. 

Neo-liberal globalization has not even led to significant growth of the world economy as a whole.  Worldwide aggregate growth rates were around 3.5% in the 1960s. And even during the troubled 1970s they fell to only 2.4%.  But as neo-liberal globalization began to take hold in the 1980s and 1990s, global growth rates fell to 1.4% and 1.1%.  Since 2000 they have been at a flat 1%.  (1)

We see a similar lackluster pattern in the case of Mexico.  Pre NAFTA the Mexican economy grew at a rate of 5% annually between 1960 and 1980.  (2)  Under neo-liberal policies that growth rate dropped to 2.3% annually from 1980 to 2004.  The picture is particularly stark in agriculture.  Between 1945 and 1961 Mexican agriculture grew at an average annual rate of 5%.  Since the 1980s it has been 1.5% and in the first trimester of 2008 it fell to a minus 1.3%. 

Under EOD 40% of what Mexico now produces is exported.  80% of that goes to its nearest market, the U.S.  On the other hand, 40% of Mexico’s food is imported, whereas in 1960 Mexico was nearly food self-sufficient.  (3) 

Under NAFTA Mexico has pursued that trade in which it enjoys a comparative advantage.  Under liberal trade theory each country should export that which it does best and import that which other countries can do better.  In international trade Mexico enjoys two advantages: a low wage work force and proximity to U.S. markets.  It is this that Mexico has tried to build on through NAFTA.  But that means that in order to preserve that advantage, Mexico has to keep wages low.  At first that was a decisive advantage –until China with wages only ¼ of those in Mexico, joined the WTO.  But Mexico still has an advantage in heavy items like automobiles where the shorter transportation routes are decisive. So too with fresh vegetables, especially in the off season.

One of the most significant market oriented reforms under NAFTA has been the privatization of ejido land.  Ejidos are communally owned land that was guaranteed under the 1917 constitution.  For the campesinos this was the crowning achievement of the Revolutionary cry for “land and liberty.”  However, as a condition for entry into NAFTA, Mexico had to amend Article 27 of the constitution, ending land reform and allowing for division of ejido land into private property which could then be sold. (4)  To assure that it would be sold, the state withdrew much of its support for small scale agriculture.  State-regulated grain reserves and price-support programs were dissolved, farm credits and subsidies were drastically reduced, and tariff and quota protections on agricultural imports have been eliminated --even while U.S. agriculture continued to receive lavish federal supports, amounting to 40% of net farm income.  In Mexico agricultural subsidies dropped from $2 billion in ’94 to $500 million in 2000.  From 1990 to 1994 farmers received 33.2% of their income from the government.  From 1995 to 2001, that dropped to 13.2%.  At the same time duty-free corn was imported from the U.S. in ever greater amounts that was cheaper for consumers than Mexican grown corn.  These conditions forced an estimated 2 million campesinos off the land in the first decade of NAFTA, swelling the supply of low wage labor. 

The privatization of the commons and other neo-liberal policies have been devastating for millions and millions of Mexico’s campesinos, who made up 40% of the population 25 years ago but are now only 30%.  They have been transformed into a low wage proletariat, migrating to urban areas and, as is well known, to the U.S.  Much of the story is told in these two factoids:  every hour Mexico receives $1.5 million in food imports; in that same hour, 30 farmers leave for the U.S.!  (5)

As a result, 16% of Mexico’s workforce in now in the U.S. –a huge loss to the nation’s economy, in spite of the $23.98 billion they sent home to their families in 2007.   These remittances total more than the foreign direct investment (FDI) in the country ($23.23 billion in 2007). 

This massive migration is in large part due to the lack of adequate employment in Mexico.  Typically 71% of new workers entering the labor force each year cannot find work in the formal sector.  If they don’t emigrate, they eek out a living in the informal sector, which now accounts for 28% of employment.  They may work as street peddlers or in mom and pop stores or find occasional off the books employment in construction or as gardeners or maids with little in the way of benefits.  In spite of long hours the small scale self-employed petty bourgeoisie on the average makes 2.5 times the minimum wage of 54 pesos per day.  It takes four minimum wages to reach the poverty line.

As can be easily seen, underemployment and unemployment are endemic.  Officially unemployment stands at 5%.  But the official statistics do not tell the story since a person is counted as employed if they work just one hour per week.  Even if you accept this minimal definition of unemployment you have to add to it the 16% of the labor force that is in the U.S. and you can realize that the economy cannot employ at least 21% of its workers.

Poverty is widespread, although estimates vary widely.  But there is general agreement that between 47% & 67% of households are in poverty.  Rural poverty is between 58% and 76%, according to Mexican economist Enrique Dussell Peters.  World Bank estimates it at 73%.  At the same time there has been a concentration of wealth in the hands of a few.  In July ’07 Carlos Slim became the richest man in the world, worth $67.8 billion, surpassing Bill Gates measly $59 billion fortune.  The best known billionaire in the country, Slim’s companies represent 40% of the total value of Mexico’s Bolsa stock index. Mexico now has more billionaires per capita than almost anywhere else. 

Industrial development has been sluggish at best.  Under EOD it was expected that the maquiladoras would be the leading sector of economic growth.  Industrialization has been heavily focused in the expanding maquiladora sector. (6) These “off-shore” production platforms for transnational corporations have spread from the border region to throughout Mexico.  Tapping the countries abundant low wage labor force and using imported components, the maquiladoras assemble commodities for foreign (mainly U.S.) markets free of duties.  They account for 80% of Mexico’s exports, although by rights they should be counted as intrafirm transfers rather than true exports.  (7)   The only thing Mexican in their production is the labor.  As off-shore production platforms for U.S. transnationals, maquiladoras lack the backward and forward linkages that could stimulate peripheral development of other firms.  They do not rely on domestic inputs, nor do they produce for domestic markets.  In a very real sense, they are not part of a national economy.  They belong to a global economy –the economy being constructed under the aegis of transnational capital.

Their main contribution to the Mexican economy is the wages they pay to their workers.  But of the 4 million firms in Mexico, only 3500 account for 97% of the exports.  And they employ only 5% of the workforce!   Foreign direct investment (FDI) has undermined endogenous development rather than contributing to it.  (8) 

Another important sector of the industrial economy is the auto industry.  Since the 1990s foreign direct investment in this area has averaged $2 billion a year and grew rapidly as Ford and General Motors struggled to cut costs.  Auto exports rose by 68% from 2004 to 2007.  75% of Mexican auto production is for export.  Mexico has been able to attract this investment because of the two main competitive advantages it enjoys:  proximity to the U.S. market and abundant cheap labor.  But apparently not cheap enough.  Last summer Ford announced that it was moving production of the popular Fiesta to Mexico, creating 4,500 new jobs here.  But the deal requires the union to accept a two tier wage structure in which new workers will be paid at half the current wage of 45 pesos per hour.  The union leader said, “We agreed to it.  We need to be more competitive.  That’s the truth.  That’s a reality.” (9)  This is after the United Auto Workers had accepted a two tier wage structure in hopes of saving U.S. jobs.  Ford is pitting Mexican workers and U.S. workers against each other in a race to the bottom –with even cheaper Chinese workers being kept in reserve.   Such is the dynamics of globalizing capitalism.  In the long run only the transnational corporations win.

In sum, what we find in Mexico under NAFTA is a classic case of dependent development.  It continues the pattern of combined and unequal development that has afflicted the global South for centuries.  It is what economist Andre Gunder Frank called “the development of underdevelopment.” (10)  Underdevelopment (as distinct from undevelopment) is a process whereby a country is developed (economically, culturally and otherwise) as a dependent appendage to the benefit of a core country.  In the era of colonialism, this defined the relationship between colony and mother country.  In the post-independence era of neocolonialism, it defined the relationship between the agricultural Third World and industrial First World.  Now in the era of globalization, it is not even the core nations of the North that benefit from the exploitation of the nations of the South.  It is the transnational corporations that are freeing themselves up from the nation-states that gave them birth.  They now roam the globe, moving freely around the globe extracting wealth from all they encounter.  It is a game that enriches the few at the expense of the many. 

This is documented in Wage-Productivity charts (below) that show the widening gap between what workers have received over the first decade or so of NAFTA compared with their productivity.  The pattern is remarkably similar in Mexico, the U.S. and Canada. 

CRISIS: WHITHER MEXICO?

I have focused on neo-liberalism’s impact on Mexico when it was working as designed –that is, working for transnational capital.  Now neo-liberalism is in crisis.  And much of that story is told in those wage-productivity charts.

What will this crisis, the exhaustion of neo-liberalism, mean for the global South, particularly Mexico?  It’s too early to tell in any detail.  But so far the indicators are all negative:

Mexico is not a failed state.  But there is potential for revolutionary upsurges in the years ahead.  In 1810 Mexico started its war for independence from Spain.  In 1910 it had a major revolution.  Many think of 2010 as the next turn of the cycle.  And then there is 2012, the year when the Mayan calendar runs out, heralding the end of an era and an opening to a new world.  Coming as that does on the heels of the next presidential election, the mass psychology of that time may lead the popular classes to expect major changes. 

Another possible scenario is for Mexico to recover from the ravages of neo-liberalism by joining other countries of Latin America in a strategy for endogenous development within a regional trading alliance based on solidarity and mutual benefit.  The crisis of global capitalism and the resulting contraction of trade, could force Mexico in this direction and to a return to an import substitution industrialization strategy.  Mexico will have to look for ways to free itself from transnational capital if it is to move ahead.   

March 11, 2009

Note:  Except for the first part and the final part, this analysis is an updated version of my April 2008 talk “Neo-Liberalism on a Global Scale: The Case of Mexico” online at
http://www.globaljusticecenter.org/articles/report_neolib.html
ENDNOTES 

1. Cited by David Harvey, “Neoliberalism as Creative Destruction”, The ANNALS of the American Academy of Political and Social Science, 610 (March 2007), p. 33. 
2. Growth averaged 6.1% if we also include the years back to 1935.  In spite of a sharp rise in the population, GDP per capita increased an impressive 348% from 1835 to 1982.
3 .David Barkin, “The End of Food Self-sufficiency” Distorted Development: Mexico in the World Economy.  (Westview Press, 1990).
4. Maria Teresa Vazquez Castillo, Land Privatization in Mexico: Urbanization, Formation of Regions, and Globalization in Ejidos.  (Routledge )
5. Laura Carlsen, “NAFTA Free Trade Myths Lead to Farm Failure in Mexico” Americas Program, Center for International Policy, December 5, 2007  http://americas.irc-online:80/am/4794
6. At first NAFTA brought a significant movement of capital from the U.S. to Mexico where wages are 11% of the U.S. level.  But then when China entered the WTO, hypermobile capital jumped across the Pacific to where wages are only 3 to 4% of the U.S. level, resulting in a decline in Mexico’s maquiladoras.
7. Until Carlos Salinas became president in 1988, maquiladora “exports” were not counted in official trade figures.  But then Salinas bundled them in with the rest and by a statistical slight of hand there was a great boom in Mexico’s exports.
8. Lyuba Zarsky and Kevin P. Gallagher, “NAFTA, Foreign Direct Investment, and Sustainable Industrial Development in Mexico”  Americas Program, Center for International Policy, January 28, 2004.  http://americas.irc-online.org
9. Juan Jose Sosa Arreola quoted in The News (Mexico City), June 5, 2008.
10. Andre Gunder Frank, Latin America: Underdevelopment or Revolution.  (Monthly Review Press, 1969).  This work gave rise to Dependency Theory, a radical alternative to the dominant Liberal Theory of Development represented by W.W. Rostow, The Stages of Economic Growth: A Non-Communist Manifesto.  (Cambridge University Press, 1969).

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