The Mexican Economy Essay, Research Paper

I. Historical, Population, Culture, Political, and Economic Information

History

Mexico was the site of some of the earliest and most advanced civilizations in the western

hemisphere. The Mayan culture, according to archaeological research, attained its greatest

development about the 6th century AD. Another group, the Toltec, established an empire in

the Valley of Mexico and developed a great civilization still evidenced by the ruins of

magnificent buildings and monuments. The leading tribe, the Aztec, built great cities and

developed an intricate social, political, and religious organization. Their civilization

was highly developed, both intellectually and artistically. The first European explorer to

visit Mexican territory was Francisco Fern?ndez de C?rdoba, who in 1517 discovered traces of

the Maya in Yucat?n. In 1535, some years after the fall of the Aztec capital, the basic

form of colonial government in Mexico was instituted with the appointment of the first

Spanish viceroy, Antonio de Mendoza. A distinguishing characteristic of colonial Mexico was

the exploitation of the Native Americans. Although thousands of them were killed during the

Spanish conquest, they continued to be the great majority of inhabitants of what was

referred to as New Spain, speaking their own languages and retaining much of their native

culture. Inevitably they became the laboring class. Their plight was the result of the

‘encomienda’ system, by which Spanish nobles, priests, and soldiers were granted not only

large tracts of land but also jurisdiction over all Native American residents. A second

characteristic of colonial Mexico was the position and power of the Roman Catholic church.

Franciscan, Augustinian, Dominican, and Jesuit missionaries entered the country with the

conquistadores. The Mexican church became enormously wealthy through gifts and bequests that

could be held in perpetuity. Before 1859, when church holdings were nationalized, the

church owned one-third of all property and land. A third characteristic was the existence of

rigid social classes: the Native Americans, the mestizos, mixed Spanish and Native American

(an increasingly large group during the colonial era), black slaves which were brought from

Africa and the Caribbean, freed blacks and white Mexicans. The white Mexicans were

themselves divided. Highest of all classes was that of the peninsulares, those born in

Spain, as opposed to the criollos, or Creoles?people of pure European descent who had been

born and raised in New Spain. The peninsulares were sent from Spain to hold the highest

colonial offices in both the civil and church administrations. The peninsulars held

themselves higher than the criollos, who were almost never given high office. The

resentment of the criollos became an influential force in the later movement for

independence. In 1808 the viceroy, under pressure from influential criollos, permitted them

to participate in the administration. Other peninsular officials objected and expelled the

viceroy. In the midst of these factional struggles a political rebellion was begun by the

Mexican people. Mexico has been rocked by political rebellion during most of its entire

history in one way or another. Under the various dictatorships that Mexico found itself

under at times in history, it made tremendous advances in economic and commercial

development. Many of the new undertakings were financed and managed by foreigners (mostly

American and European). This was and continues to be a major factor in the discontent of

most Mexicans. Moreover, the government favored the rich owners of large estates,

increasing their properties by assigning them communal lands that belonged to the Native

Americans. When the Native Americans revolted, they were sold into peonage. Discontent,

anger and a spirit of revolt continued to grow throughout Mexico. Madero was elected

president in 1911, but was not forceful enough to end the political strife. Other rebel

leaders, particularly Emiliano Zapata and Francisco (Pancho) Villa, completely refused to

submit to presidential authority. Victoriano Huerta, head of the Madero army, conspired

with the rebel leaders and in 1913 seized control of Mexico City. New armed revolts under

Zapata, Villa, and Venustiano Carranza began, and Huerta resigned in 1914. Carranza took

power in the same year, and Villa at once declared war on him. In addition to the ambitions

of rival military leaders, intervention by foreign governments seeking to protect the

interests of their nationals added to the confusion. In August 1915, a commission

representing eight Latin American countries and the United States recognized Carranza as the

lawful authority in Mexico. The rebel leaders, except for Villa, laid down their arms. The

bandit leader incited his forces to commit crimes against Americans to show his resentment

against the United States and in 1916 led a raid on Columbus, New Mexico. As a result, an

American force under General John J. Pershing was sent to Mexico. A new constitution,

enacted in 1917, provided for a labor code, prohibited a president from serving consecutive

terms, expropriated all property of religious orders, and restored communal lands to the

Native Americans. Many provisions dealing with labor and social welfare were advanced. Some

of the most drastic were intended to curb foreign ownership of mineral properties and land.

In 1936 an expropriation law was passed enabling the government to seize private property

whenever necessary for public or social welfare. The national railways of Mexico were

nationalized in 1937, as were the soil rights of the oil companies. A government agency

called Petr?leos Mexicanos, or Pemex, was created to administer the nationalized industry.

The expropriations seriously affected the Mexican oil industry, for it became difficult for

Mexico to sell oil in U.S., Dutch, and British territories. Mexico was forced to arrange

barter deals with Italy, Germany, and Japan. The oil trade with these nations was

interrupted by World War II. In 1940, the so-called Good Neighbor Policy of the United

States became dominant in Mexican politics. This policy involved close cooperation with the

United States in commercial and military matters. Mexico agreed to allow the United States

Air Force to use Mexican airfields and also agreed to export critical and strategic

materials (mostly minerals) only to countries in the western hemisphere. Consistent with its

policy of cooperation with the United States, Mexico severed diplomatic relations with

Japan, Italy and Germany in December 1941. In May 1942, after the sinking of two Mexican

ships by submarines, the Mexican Congress declared war on Germany, Italy, and Japan. Later

that same year a trade agreement, establishing mutual tariff concessions, was negotiated by

Mexico and the United States. In 1944, Mexico agreed to pay U.S. oil companies $24 million

plus interest, for oil properties expropriated in 1938. In June 1945, Mexico became an

original member of the United Nations. The government stabilized the peso in with the aid

of loans from the Treasury of the United States and the International Monetary Fund. In

1950, the problem of Mexican laborers who entered the United States to seek seasonal farm

employment became a matter of grave concern to the two governments. Official agreements

between Mexico and the United States provided for the legal entry of a specified number of

such workers annually. Approximately 1 million, however, crossed the border illegally every

year. The problem was further complicated by the demand of the Mexican government for

guarantees against the exploitation of its citizens by U.S. employers and by the hostility

of U.S. farm labor organizations toward the competition of Mexican migratory laborers

willing to work for substandard wages. In March 1952, the Congress of the United States

passed a bill providing for the punishment by fines and imprisonment of those recruiting and

employing aliens who entered the country illegally. The Mexican economy grew at a healthy

annual pace during the period from 1970 to 1974, but beginning in 1975 growth decreased

markedly and inflation rose substantially. In an attempt to reduce the nation’s

foreign-trade deficit, the government in 1976 devalued the peso by more than 50 percent by

changing from a fixed to a freely floating exchange rate. A potentially beneficial economic

development was the discovery in 1974 and 1975 of huge crude-petroleum deposits in Campeche,

Chiapas, Tabasco, and Veracruz states. Oil production more than doubled during the latter

half of the 1970s. By the mid-1980s a rapid increase in foreign debt, coupled with falling

oil prices, had plunged the country into severe financial straits. In 1989, the Salinas

government sped up the privatization of state-controlled corporations and modified

restrictive trade and investment regulations to encourage foreign investment by permitting

full control of corporations by foreign investors. The current president, Ernesto Zedillo,

is a strong advocate of reform. He has taken the lead in performing budget cuts, price and

tax adjustments, tight monetary policy and further deregulation and privatization.

Population

The Mexican population is composed of three main groups: the people of Spanish descent, the

Native Americans, and the people of mixed Spanish and Native American ancestry, or mestizos.

Of these groups, the mestizos are by far the largest, constituting about 55 percent of the

population. The Native Americans total about 30 percent. The population of Mexico is

90,419,606. The population density in 1990 was 119 people per square mile with about 73

percent of Mexicans living in urban areas. (Encarta, “Mexico”)

Political Divisions

Mexico consists of 32 administrative divisions?31 states and the Distrito Federal (federal

district), which is the seat of the federal administration. The national executive power is

vested in a president, who must be Mexican-born and the child of a native Mexican. The

president is popularly elected for a six-year term and may never be reelected. The president

appoints the cabinet, which is confirmed by the congress. The legislative power in Mexico

consists of the senate and the chamber of deputies. The upper house is a senate, with 64

members popularly elected for six years. Two senators are elected from each state and from

the federal district. The lower house is a chamber of deputies, made up of 500 members

elected to 3-year terms. Three hundred are elected from single-member districts based on

population, and the remainder are elected according to a system of proportional

representation. Senators and deputies may not serve two consecutive terms. The highest

tribunal in Mexico is the supreme court of justice, made up of 21 full-time members

appointed by the country’s president with the consent of the senate. Other important

judicial bodies in Mexico include circuit courts and district courts. The chief executive of

each state is a governor, popularly elected to a six-year term. The governor of the federal

district is appointed by the president of Mexico. Legislative power in the states is vested

in chambers of deputies, whose members are elected to three-year terms. The Partido

Revolucionario Institucional (Institutional Revolutionary Party; PRI) is the largest and

most important political party in Mexico. It was formed in 1928 as the Partido Nacional

Revolucionario (National Revolutionary Party) and has been continuously in power since that

time, although under several different names. Opposition parties exist, but not until the

1980’s did they represent a serious challenge to the PRI. Chief among them is the Partido

de Acci?n Nacional (National Action Party; PAN), a conservative, pro-Catholic group drawn

primarily from the middle class and the Frente Democr?tico Nacional (National Democratic

Front, FDN), a coalition of leftist opposition groups. (Encarta, “Mexico”)

Culture

Mexican culture is a rich, complex blend of Native American, Spanish, and American

traditions. Rural areas are populated by Native Americans, descendants of the highly

developed societies of the Maya, Aztec, and Toltecs, and by Spanish and mestizo farmers and

laborers. Each of these heritages has enriched the regional culture. In the cities, both

European and North American influences are evident. Most contemporary Mexican artists are

striving to produce identifiably Mexican work that blends Spanish, Native American, and

modern European styles. (Encarta, “Mexico”)

Economy

Mexico reflects a shift from a primary-production economy, based on mining and agriculture,

to a semi-industrialized nation. Economic achievements are the result of a vigorous private

enterprise sector and government policies that have made economic growth a predominant

objective. Traditionally, the government also emphasized Mexicanization of industry, and

local control of companies engaged in mining, fishing, transportation, and exploitation of

forests was required by law. More recently, however, foreign investment in new enterprises

has been actively encouraged, and government controls on some sectors of the economy have

been loosened. Mexico’s gross domestic product (GDP) increased by 6.5 percent annually

during the period from 1965 to 1980 but only 0.5 percent yearly during 1980 to 1988. Weak

oil prices, rising inflation, a foreign debt of more than $100 billion, and worsening budget

deficits exacerbated the nation’s economic problems in the mid-1980s, although the economic

picture brightened toward the end of the decade. In 1992 the GDP was $324.29 billion. The

annual budget included $107 billion in revenue and $122 billion in expenditure. (Encarta,

“Mexico”)

II. NAFTA

In December of 1992, Presidents Salinas and Bush and Prime Minister Brian Mulroney of Canada

signed the North American Free Trade Agreement (NAFTA). The Mexican legislature ratified

NAFTA in 1993 and the treaty went into effect on January 1, 1994, creating the largest

free-trade zone in the world. Creating a North American free-trade zone and privatizing

state-owned industry was part of a plan by the Salinas government to revive the Mexican

economy. By 1993, the Mexican government had sold 80 percent of its industries to private

investors for about $21 billion and had reduced inflation from 150 percent to 10 percent. In

November 1993, President Clinton predicted that if the trade agreement passes, American

companies will add another 200,000 jobs by 1995. NAFTA’s promoters predicted that by the

end of 1995 the U.S. would enjoy a $9 billion trade surplus with Mexico. The reality is

that the post-NAFTA surge in imports from Mexico has resulted in an $8.6 billion trade

deficit with Mexico for just the first six months of 1995. By adding the Mexican trade

deficit numbers to the current deficit with Canada, the overall U.S. NAFTA trade deficit for

the first six months of 1995 alone is $16.7 billion. Using the Department of Commerce trade

data in the formula used by NAFTA proponents used to predict job gains, the real accumulated

NAFTA trade deficit would translate into over three hundred thousand U.S. jobs lost. A

number of companies that specifically promised to create new jobs actually laid workers off

because of the agreement. Allied Signal, General Electric, Mattel, Proctor and Gamble,

Scott Paper and Zenith all made specific promises to create jobs, and all have laid off

workers because of NAFTA as certified by the U.S. Department of Labor’s special NAFTA

unemployment assistance program (NAFTA TAA). As of mid-August 1995, the U.S. Department of

Labor has certified 38,148 workers as having lost their jobs to NAFTA. A total of 68,482

U.S. workers have filed to receive NAFTA-related unemployment assistance through the

NAFTA-TAA program. Despite the job losses, trade officials said NAFTA remains a net gainer

for U.S. workers. Increased exports to Mexico and Canada will support some 3 million U.S.

jobs this year, up some 500,000 from two years ago, according to the U.S. Trade

Representative’s office. (Briones)

III. Recent Events

A. The Chiapas Uprising and the Zapatistas

On January 1, 1994, a group of Native Americans called the Zapatista National Liberation

Army (EZLN) captured four towns in the southern Mexican state of Chiapas and demanded

reforms from the Salinas government for better treatment for poor Indians there. They

chose to begin their rebellion to coincide with the implementation of NAFTA because they

consider it a “death sentence.” They demand bilingual and intercultural education in their

indigenous language as well as in Spanish. They want titles and protection of the lands

where they live. Finally, they say that the governments should ratify the International

Labor Office’s (ILO) resolution 169 on the promotion and protection of the rights of

indigenous people. The group is named for Emiliano Zapata, a 19th-century Mexican

revolutionary leader and agrarian reformer. The EZLN has organized itself among some of the

most dispossessed people of the world. Its’ soldiers are drawn from the forests, mountains

and small towns of the region, both from the indigenous Mayan population, and from

immigrants from Central and Northern Mexico. The EZLN soldiers have been subsistence

cultivators and landless wage-laborers. They have grown and marketed their own export crops

and have worked on the plantations and ranches of others. A very few are intellectuals

drawn to the area over a decade ago by their ideals and hopes. The EZLN understands how

NAFTA opens Mexico to U.S. exports and imports, and how the most threatening of these is

corn, the basic food crop of the indigenous population and an important source of cash

income. Already they are suffering from low prices for coffee, another cash crop, due to

government’s elimination of financial support for that production. They also know that

export development means ecological destruction, especially deforestation. (Marcos) Although

Mexican troops quickly retook most of the territory held by the rebels and a cease-fire was

called soon afterward, the rebel group generated momentum for political reform in Mexico. A

government negotiating team, headed by former Mexico City mayor Manuel Camacho Solis, met

with rebel leaders and offered them a 34-point proposed agreement that included promises of

political changes, new social programs, land reform, and better standards of living.

However, the group rejected the plan in June.

Subcommandante Marcos is the enigmatic spokesperson and highest army commander of the

Zapatista National Liberation Army. He is known for his well-written press releases filled

with wit and sarcasm. He is always masked in public, and often smokes a pipe. The

government claims to have “identified” Marcos as Rafael Sebastian Guillen Vicente, but

Marcos and the EZLN have denied this.

Major Ana Mari’a was the commander of the operation for taking the municipal palace of San

Cristo’bal for the Zapatista National Liberation Army (EZLN). She was 25 years old when she

joined the Zapatista Army and saw almost the whole process of how it moved forward. She was

one of the first women who was part of the ranks of the Army and has risen to hold the

highest rank of any woman in the EZLN. (Gabriel) This revolt affects the current exchange

rate due to the uncertainty surrounding this uprising. Many valuable resources can be found

in the Chiapas region, such as timber, coffee and oil. Many foreign industries have reduced

or canceled work in the region for fear of being caught between the EZLN and government

troops. There is much more fighting taking place than most American newspapers report.

With businesses reducing their spending in Mexico, the inflow of U.S. dollars is reduced

which increases the demand for the dollar in Mexico. This causes the dollar to strengthen

against the peso.

B. The Colosio Assassination

On March 23, 1994, during the Mexican presidential campaign, the PRI’s candidate Donaldo

Luis Colosio Murrieta, was assassinated while campaigning in Tijuana, Baja California.

Unnamed U.S. intelligence officials have stated that former Mexican police commander

Fernando de la Sota Rodalleguez, charged in connection with the assassination, was a paid

informant for the U.S. Central Intelligence Agency in Mexico City from 1990 to 1992. De la

Sota began his police career in 1973 working for Mexico’s Federal Security Directorate, and

by 1992 he had become investigations department commander for the federal attorney general’s

office. He was fired that year on suspicion of taking bribes from alleged drug lord Rafael

Aguilar Guajardo and the CIA dropped him soon after. De la Sota was working as the head of

the private security team for Colosio on the day of the assassination. Federal

investigators arrested De la Sota in February of this year on charges of giving false and

conflicting testimony about the assassination. Despite his 20 years’ experience in police

work, De la Sota claimed that the gunshots set off a diabetic attack which kept him from

seeing what was happening. He was released on Feb. 28 on a $7,000 bond. At the time of his

arrest, Mexican officials indicated off the record that De la Sota was closely connected to

the assassination. Currently two men are under arrest for the murder: Mario Aburto

Martinez, a factory worker who allegedly shot Colosio in the head from the right side, and

Othon Cortes Vazquez, who is charged with shooting the candidate in the abdomen from the

left side. Cortes Vazquez and De la Sota knew each other. Cortes Vazquez worked for

various PRI officials as a driver and messenger, and on the day of the murder he was driving

for Gen. Domiro Roberto Garcia Reyes, who was in charge of the official security for

Colosio. One of the videotapes held by the attorney general’s office reportedly shows De la

Sota and another member of the private security team, Hector Javier Hernandez Thomassiny,

guarding Colosio’s left side. Cortes Vazquez suddenly “replaced” the two experienced

bodyguards just before he and Aburto shot the candidate, according to people who saw the

tape. As soon as Colosio fell, De la Sota and Hernandez Thomassiny allegedly seized Aburto

and let Cortes Vazquez escape. The uprising in Chiapas and the murder of presidential

candidate Luis Donaldo Colosio are two examples of how Mexico’s social and civic

institutions are crumbling under the pressure of drug-related lawlessness and corruption,

factors that are making Mexico a very dangerous place even for members of the ruling elite.

Indeed, the same environment of lawlessness and impunity that has allowed Mexico’s ruling

party, known as the PRI, to govern for over 65 years is now aiding the expansion of the

influence of the narcotics trade. Federico Reyes Heroles, editor of the monthly magazine

Este Pais, says bluntly that the killing was a deliberate hit by Mexico’s powerful drug

lords. News reports in the days following the killing included numerous off-the-record

comments by government officials confirming the suspicion that the killing was a hit

organized and paid for by drug traffickers. Another prominent Mexico City editor, speaking

off-the record, says that the Mexican politicians are being killed off because of a power

struggle related to money and drugs, not over questions such as democracy and human rights.

Beyond the death of Colosio, however, another explanation exists: the need to maintain the

appearance of “fighting drugs” to satisfy Washington. Eduardo Valle, former aide to Interior

Minister Jorge Carpizo, has given the Mexican government documents and testimony allegedly

linking government officials and drug traffickers to the assassination of presidential

candidate Colosio. The former official, who is known as “the owl”, worked as a senior

official directing Mexico’s anti-drug efforts. He says that Colosio was murdered by members

of the Grupo del Gulfo cocaine cartel, with the involvement of Colosio campaign officials

close to Communications and Transportation Minister Emilio Gamboa. Included with the

documents provided by Valle during testimony given at the Mexican consulate in Washington

was a DEA report about telephone calls last December by cartel members to the offices of the

presidency. (Whalen, p.2-4) Assassinations affect exchange rates due to the uncertainty that

is caused. Many investors flee from the market if there is a risk of losing their

investments. Without these investments, the economy begins to tumble downward due to

increased unemployment and a lower demand for goods. This may cause the dollar to

strengthen as the people move away from the uncertain peso.

IV. Exchange rate

See graph attachment.

V. Devaluation of the Peso

Due to the weaken peso, caused by constant printing of money and high inflation, Mexican

investors took close to $11 billion dollars out of Mexico in a few days in December 1994.

The political turmoil from regional insurrection to a string of assassinations and

disrupted elections help cause the collapse of the peso, requiring a $20 billion bailout

from the U.S. Treasury. The International Monetary Fund has pledged another $17.8 billion,

while the central banks of other industrialized nations, acting through the Bank of

International Settlements, are obligated for an additional $10 billion. (Banda)

VI. Advantages/Disadvantages of Importing/Exporting Goods

A Houston company exporting to Mexico will find some difficulty selling its goods in a

country were the peso is weak against the U.S. dollar. The Mexican businesses will be

forced to buy only the necessities due to the unfavorable exchange rate. However, on the

positive side, if the Mexican businesses expect that the peso will devalue further, it may

decide to purchase big ticket items now in hopes of beating any further devaluation.

A Mexican company whose primary business is exporting Mexican made products to the U.S. will

enjoy the weak peso, strong dollar economy. Imports from Mexico into the U.S. has resulted

in an $8.6 billion trade deficit with Mexico for the first six months of 1995. While the

Mexican company is paying for its labor and overhead with weakened pesos, it is receiving a

stronger U.S. dollar for its goods. The company can request payment in the stronger U.S.

dollar and invest them into various financial instruments until the peso can rebound or is

needed to continue operations.

VII. Opinion

The signs are growing ever stronger that Mexico’s determined adherence to its economic

austerity program is setting the stage for a remarkably solid and sustainable recovery from

the recent financial crisis. The country’s Bolsa stock index has rebounded more than 60

percent from its February low, the peso has stabilized, compared to what it has done in the

past, and Mexico’s recent $500 million bond offering was oversubscribed by $1.3 billion.

Mexico is making clear progress in improving its debt structure, and strong export growth is

producing a dramatic correction in Mexico’s current account imbalance. Mexico has a balanced

federal budget and a largely privatized economy. The North American Free Trade Agreement

and Mexico’s other trade pacts are continuing to play a significant role in creating new

opportunities for Mexican businesses. A number of U.S. companies have chosen to create

co-production partnerships with Mexican firms over geographically more remote partners in

Asia because of Mexico’s proximity, modern infrastructure and industrious workforce. NAFTA

is playing a key role in encouraging such partnerships. By reducing North American trade

barriers, NAFTA is enabling firms which might otherwise manufacture in Asia to work with

Mexican partners instead. The growth of business partnerships, along with Mexico’s ongoing

economic, legal, judicial and political reforms helps to explain Mexico’s ability to attract

long-term investment. However, the peso is currently in a tailspin against the dollar due

mostly to currency speculators. If the Mexican government can stay with its current plans

and programs with minor adjustment, the peso should rebound. The bottom line from Mexico is

that its continued commitment to open markets and economic integration is paying off and

will be reflected in the overall strengthening of the Mexican peso against the U.S. dollar

in the long run.

REFERENCES

Banda, M., (1995, September 5). Economic, Political Crisis Shadows Zedillo’s First National

Address. Associated Press, Internet (WWW), http://www1.trib.com/NEWS/APwire.html.

Briones, J., (1995, September 4). NAFTA’s Broken Promises. Public Citizen Publication,

p.10.

Dean, D., (1995, September 20). Mexico Doing Right Things to Turn Itself Around. Houston

Chronicle, Sec. A, p.29.

Gabriel, S., Mount Holyoke College. Internet (WWW), Newsgroup: soc.culture.mexican.

Marcos, Subcomandante Insurgente, (1995, August 30). Sub. Marcos Communique to the National

Conference for Peace. La Jornada, Internet (WWW), Newsgroup: soc.culture.mexican.