by
Howard H. Donnell
Comparative Political Economy of Globalization: Middle East, Latin
America, Asia, and Africa
Professors Catherine Boone and Clement Henry
October 5, 1998
Introduction
Over the past two decades the Mexican economy has been marked by
two tumultuous cycles of expansion, crisis and recovery. During this it
has undergone a process of transformation from a relatively closed,
national economy following the Import Substitution Industrialization (ISI)
model of development, to a mostly open economy incorporated into regional
and global markets, and now party to the General Agreement on Tariffs and
Trade (GATT) and the North American Free Trade Agreement (NAFTA). During
this same period, the political system has witnessed a more gradual and
negotiated process of liberalization. The presidentialist government ruled
by the Institutional Revolutionary Party (PRI) for seven decades has
traditionally been classified as primarily authoritarian in character and
corporatist in structure. While the ruling party initiated liberalizing
reforms in 1988, electoral fraud and clientelistic structures continued to
assure the PRI's dominance. Only since opposition parties won control of
the national legislature from the PRI in 1997-in the wake of an economic
crisis which erupted in late 1994 (after the previous elections), in
relation to which high-level PRI officials were implicated in multiple and
massive corruption scandals-has Mexico taken on a mantle of democratic
legitimacy, rather than one of pseudodemocratic authoritarianism. Hence
the country finds itself progressing in fits and starts toward a more
democratic political system, while the economic system struggles to
insulate (if not inoculate) itself from vicious cycles of expansion and
contraction as it integrates itself into international markets.
This paper provides a brief profile of Mexican political economy,
examining various economic variables and ratios in light of the political
relations behind them. The first section provides an overview of the
structure of the economy. The subsequent part characterizes the structure
of the financial sector, focusing especially on banks and stock markets.
The final section discusses the national and international politics of
Mexican economic liberalization over the past two decades.
Overview of the Mexican Economy
As a large country classified by the World Bank as an
"upper-middle-income" developing country, with ample natural resources
(including oil) and a surplus of labor, Mexico has a relatively diversified
economy in which services comprised two-thirds of gross domestic product
(GDP) in 1995, industry just over one quarter, and agriculture less than
eight percent. While services have come to account for a greater
percentage of GDP over the past two decades, and agriculture and industry
each slightly less, their rank ordering has not changed. While private and
public consumption ratios have remained stable over the period, imports of
goods and services have more than doubled as a percentage of GDP between
1975 and 1995 (see Table 1).
Table 1
Structure of the Mexican Economy
1975 1985 1994 1995
(% of GDP)
Agriculture 10.8 9.1 8.0 7.7
Industry 29.9 33.5 28.1 25.7
Services 59.4 57.4 64.0 66.5
Private consumption 71.6 64.8 70.0 71.2
General government consumption 9.3 9.3 11.6 10.3
Imports of goods and services 9.0 10.4 17.8 22.2
SOURCE: World Bank 1997a.
While total imports exceeded total exports both in 1980 and the
mid-1990s, the volume of both increased at least fourfold during the
period. The most significant difference is in the relative contributions
of the main sectors. In 1980, under ISI and amidst an oil boom, Mexico
exported primarily fuels, minerals and other metals, with other primary
commodities ranking a distant second and manufactures third. With the rise
of the foreign-owned maquiladora in-bond production system, concentrated
principally along the nation's northern border, the volume of manufactured
items exported became at least four and a half times greater in magnitude
than that of primary products by 1994. Throughout the period, machinery
and transport equipment remained the predominant type of import, although
it more than doubled its share of total imports (see Table 2).
Table 2
Mexican Trade
1980 1985 1994 1995
(millions US$)
Total exports (fob) 15,600 26,900 60,879 79,543
Fuels, minerals, and metals 11,435 n/a 8,561 n/a
Other primary commodities 2,293 n/a 4,410 n/a
Manufactures 1,856 n/a 38,707 n/a
Total imports (cif) 19,500 17,800 79,500 72,500
Food 3,140 2,207 5,306 n/a
Fuel 390 783 1,572 n/a
Machinery and transport equipment 8,405 7,743 31,113 n/a
SOURCE: World Bank 1997a.
Indicative of the opening of the Mexican economy after the debt
crisis of 1982, which heralded the demise of inward-looking ISI policies
throughout many parts of the developing world, the percentage of GDP
constituted by trade rose from 30.2 percent in 1985 to 37.2 percent in 1994
(the first year in which NAFTA was in effect), then leaped to 60.8 percent
of a contracted GDP in the crisis year 1995. In that last year, as a
result of the drastic fall in the value of the peso, total exports rose to
US$79,543 million from US$60,879 the year before, while imports fell from
US$79,500 million to US$72,500 million; meanwhile GDP contracted from
US$377 billion in 1994 to US$250 billion in 1995 (World Bank 1997a).
Corresponding to the trend in trade of goods and services is the opening of
the Mexican economy to foreign investment. In 1985 foreign direct
investment constituted just one quarter of one percent of GDP, whereas the
ratio had climbed to 2.1 percent in 1994, before falling back in 1995 to
1.65 percent. The significant differences between 1994 and 1995 suggest
that the Mexican economy remains at significant risk of periodic crisis,
though the timing of this crisis-like previous ones during the period of a
more closed and controlled economy-is largely a function of domestic
political variables, particularly the dynamics of the political cycles,
especially the six-year presidential term. Mexico has a tradition of
presidents leaving office with the economy either having just gone into
crisis, or else just about to do so-usually triggered by a devaluation of
the previously-overvalued peso. Despite all of Carlos Salinas de Gortari's
(1989-1994) neo-liberal reforms, the pattern has yet to be broken. Many
attribute corrupt practices, recently labeled "crony capitalism" in
relation to its role in the current crisis in Southeast Asia, to the
perpetuation of this vexing phenomenon.
The Mexican Financial Sector
The vicissitudes of the Mexican economy are reflected in the
changes in policy toward banks in Mexico. The government of Miguel de la
Madrid (1982-1988) responded to the 1982 peso crisis by nationalizing all
banks in Mexico, after foreign commercial banks ceased their lending, which
had been predicated upon Mexico's ability to repay from increasing revenue
derived from the state-owned petroleum monopoly, PEMEX. When world oil
prices fell, however, Mexico became unable to repay its debts to its
foreign creditors, many of whom were the largest U.S. commercial banks. A
decade later, however, after the Mexican economy had slowly recovered,
President Salinas oversaw the re-privatization of Mexican banks. In 1991,
nine sales occurred, of which all were over 60 percent of total equity and
two were 100 percent. Of these, eight were direct sales and the other a
public offering. Only in the last case were foreign investors involved.
The following year, another nine sales took place, all direct sales, each
involving between 51 and 82 percent of equity, all sold to Mexican
investors. In 1994, one further direct sale took place, though it involved
only 11.4 percent of equity (World Bank 1997b).
In addition to denationalizing Mexican banks, the government also
later permitted foreign banks to establish branches or affiliates in
Mexico, which had been anathema to previous nationalist policy makers.
Consequently, by mid-1997, six affiliates of foreign banks had opened,
along with seven offices representing foreign banks. The Association of
Mexican Bankers lists a total of 60 banks in Mexico as of that time,
including full-service commercial banks, state-owned development banks, and
the two categories just mentioned (ABM 1997, 69-70). All of these are
subject to the macroeconomic direction of the now-autonomous central Banco
de M=E9xico, under the directorship of Guillermo Ortiz.
According to the Bolsa Mexicana de Valores, there were twelve
commercial banks in Mexico in 1996 with a cumulative net worth of
32,068,835,000 pesos or US$4,082,965,000. The previous year these
institutions' net worth had been 28,496,404,000 pesos, then equivalent to
US$3,708,441,000 (BMV 1997, 377), which constituted 4.8 percent of net
domestic credit that year. These 12 banks' deposits cumulatively
accounted for 229,774,832,000 pesos or US$29,902,245,000 in 1995 and
334,095,109,000 pesos or US$42,536,586,000 in 1996, an increase of 13.85
percent in pesos but 42.25 percent in dollars (BMV 1997, 378). The largest
bank, Bancomer, accounted for 38 percent of all deposits in 1996; the
largest four of the twelve held a dominating 72.4 percent of the market
that year. The sum of squares of the market shares of the twelve is 0.200
(see table 3).
Table 3
Commercial Bank Performance, 1995-1996
Net Worth Change (%)
(dollars) (pesos x 1000) (dollars x 1000)
(real pesos)
1995 28,496,404 3,708,441 n/a n/=
a
1996 32,068,835 4,082,965 -11.88 10.1=
0
Total Deposits
(pesos x 1000) Change 96/95 (%) ($ x 1000)
Change 96/95 (%)
1996 229,774,832 13.85 334,095,109 42.2=
5
SOURCE: BMV 1997, 377, 379.
Table 4
Total Deposits, 1996
Rank Issuer (abbrev.) Pesos x 1000 Dollars x 1000
1 BACOMER 127,210,418 16,196,277
2 BACRECE 44,616,740 5,680,550
3 INTENAL 36,990,566 4,709,594
4 MRCANTI 33,129,511 4,218,009
5 PROMEX 22,547,729 2,870,750
6 CONFIA 20,106,856 2,559,981
7 BANORO 16,388,973 2,086,624
8 ATLANTI 15,473,700 1,970,093
9 BANORTE 14,449,559 1,839,700
10 BAINDUS 1,885,404 240,047
11 SFQ 935,259 119,076
12 BINVEX 360,394 45,885
Total 334,095,109 42,536,586
SOURCE: BMV 1997, 380.
Privatization has not proven to be a panacea for the Mexican
banking system; nearly four years after the most recent crisis began the
system is the subject of a politically-sensitive bailout plan by the
government, which did not have adequate regulatory institutions in place
after the 1991-1992 privatizations and before the 1994-1995 peso crisis.
In late 1995, the government bailed out Banco Inverlat, then the nation's
fifth largest commercial bank,with a 1.4 billion-peso loan after the bank
lost 165 million pesos ($25 million) in loans which became non-performing
during the first six months of the crisis (Crawford 1995). Two weeks later
Banamex, then the nation's largest bank, arranged to sell off 15 billion
pesos ($2 billion) in non-performing loans to the government. Most of
those bank assets remain in the government's bailout fund, called FOBAPROA
(Fondo Bancario de Protecci=F3n al Ahorro), right up to the latter part of
1998. A proposal to convert the $2 billion into public debt has met stiff
resistance in the legislature, which is now controlled by the opposition
parties. Especially the center-left PRD has used the issue to gain
popularity with voters, arguing that such a move would be an attempt to
have the poor majority of the population shoulder the burden of the wealthy
few who control and hold shares in the insolvent banks. Furthermore, in
the spring of 1998, three of the largest commercial banks were implicated
in a drug-money laundering sting operation set up by the U.S. Customs
Service.
The Mexican stock market, called the Bolsa Mexicana de Valores, has
also been subject to the vagaries of the international economy, with
portfolio investors rushing to invest in Mexico in the early 1990s, then
quickly withdrawing their money when the peso fell in 1994-1995, then more
recently returning with somewhat greater caution. In 1990, market
capitalization stood at $32,725 million, which constituted 13.2 percent of
GDP. In 1995, by contrast, market capitalization had soared to $90,694
million, or 36.3 percent of GDP. It is likely that figures for 1994 up
through November would be even higher. Value traded similarly rose from
4.9 percent of GDP in 1990 to 13.7 percent in 1995. Nevertheless, the
number of listed domestic companies declined from 199 in 1990 to 185 in
1995 in the wake of corporate mergers and buyouts.
Debt and the Politics of Liberalization
The Mexican debt crisis which began in 1982 proved to be the
harbinger of a decade of economic misery throughout Latin America and other
regions of the developing world. The structure of capital inflows changed
sharply, away from commercial bank loans and toward "exceptional financing"
from the IMF and World Bank, despite maintaining a nationalistic,
"heterodox" economic reform policy during the 1980s. Debt restructurings
took place throughout the decade and on to 1992 (World Bank 1997b, 367).
By the early 1990s portfolio and direct investment surpassed exceptional
financing in significance (Stallings 1995, 158), yet the nation remains
heavily indebted. Whereas in 1991 Mexico used $6,766 million in IMF
credit, by 1994 it had reduced the amount added to $3,860 million-only to
have the peso crisis require more exceptional financing-$15,828 million in
1995. Whereas total debt stocks stood at $57,378 million in 1980 and
$104,442 million in 1990, by 1994 the figure had reached $139,955, before
soaring to $165,743 the following year. Between 1994 and 1995, the ratio
of external debt to gross national product grew from 38.4 percent to 69.9
percent. International reserves to external debt more than doubled, from
4.6 percent to 10.3 percent. Furthermore, leading up to the crisis in
1994, Mexico had let its supply of international reserves in relation to
its exports of goods and services dwindle to just 0.7 months worth-3 weeks!
Two thirds of Mexican debt was denominated in U.S. dollars in 1995, up
from 60 percent the year before (World Bank 1997b, 364,366). While not
presently considered to be in crisis, Mexico still carries an outstanding
debt burden of $125,339 million as of the end of 1997 (EIU 1998, 28).
Through all the tumult the Mexican economic system has been
remodeled to a significant extent to resemble the U.S. model, at least in
juridical form. The Salinas administration pushed through a neo-liberal
"reform of the state," reshaping the role of the government as regulator
rather than owner and operator. The central bank is now autonomous and has
resisted political pressures including some arising from the opposition
parties presently. As such, the Mexican financial system most resembles
the competitive, market-based Anglo-Saxon model, though it will retain
vestiges of its statist past as long as Mexican democracy and economic
stability remain a work in progress. The outcome of the current debate
over how to deal with the $2 billion in bank assets should indicate whether
Mexico's tradition of "crony capitalism" will endure in to the next
century, or if the locus of political and economic power in Mexico has
indeed shifted toward the middle and popular classes.
Bibliography
Asociaci=F3n de Banqueros de M=E9xico (ABM). 1997. Anuario Financiero de l=
a
Banca en M=E9xico: Ejercicio 1996. Vol. 62. M=E9xico, D.F.:
Asociaci=F3n de Banqueros de M=E9xico, A.C.
Bolsa Mexicana de Valores (BMV). 1997. Anuario Financiero de la Bolsa
Mexicana de Valores 1996. M=E9xico, D.F.: Bolsa Mexicana de Valores.
Crawford, Leslie. 1995. "Mexico rescues bank," Financial Times (1
December), 5.
____________. 1998a. "Cartel 'laundered millions' through bank,"
=46inancial Times (25 March), 8.
____________. 1998b. "Mexico plans bank reforms," Financial Times (25
March), 46.
De C=F3rdoba, Jos=E9. 1998. "Mexican Banking-System Bailout Is Bonanza for
Opposition Leader," Wall Street Journal (27 August), A10.
DePalma, Anthony. 1995. "Aid for Mexico Gives Economy Shot in the Arm,"
New York Times 144 (2 February), A1, A12.
Deveney, Paul J. 1998a. "World Bank Clears Big Loan to Mexico," Wall
Street Journal (2 July), A17.
____________. 1998b. "Mexican Opposition Lists Beneficiaries," Wall
Street Journal (5 August), A10.
Dorn, James A. and Roberto Salinas-Le=F3n, eds. 1996. Money and Markets in
the Americas: New Challenges for Hemispheric Integration. Vancouver,
B.C.: The Fraser Institute.
Economist Intelligence Unit (EIU). 1998. Country Report: Mexico. 3rd
quarter 1998. London: The Economist Intelligence Unit.
El-Erian, Mohamed A. 1990. "Mexico's Commercial Bank Financing Package,"
=46inance and Development 27:3 (September), 26-27.
=46ederaci=F3n Latinoamericana de Bancos (FELABAN). 1994. Gu=EDa Financiera=
.
14th ed. Bogot=E1: Federaci=F3n Latinoamericana de Bancos.
=46riedland, Jonathan. 1998a. "Mexico's Zedillo Predicts Passage of
Reforms, But Warns of Possible Further Cuts in Spending," Wall Street
Journal (10 June), A13.
____________. 1998b. "Mexican Officials Land in the Hot Seat; Congress
Grills Businessmen, Policy Makers on Bank Bailout," Wall Street Journal (31
July), A9.
____________. 1998c. "Mexican Accord On Bank Bailout Starts to Emerge,"
Wall Street Journal (24 August), A8.
"Government to Bail Out Banamex." 1995. Los Angeles Times 114 (16
December), D2.
Haggard, Stephan and Robert R. Kaufman. 1995. The Political Economy of
Democratic Transitions. Princeton: Princeton University Press.
Krugman, Paul. 1997. "Latin Lessons for Asia," Far Eastern Economic
Review 160:39 (25 September), 34.
Mahon, James E., Jr. 1996. Mobile Capital and Latin American Development.
University Park, PA: The Pennsylvania State University Press.
Maxfield, Sylvia. 1992. "The International Political Economy of Bank
Nationalization: Mexico in Comparative Perspective," Latin American
Research Review 27:1 (winter), 75-103.
____________. 1997. "Capital Mobility and Mexican Financial
Liberalization." In Michael Loriaux, et al., Capital Ungoverned:
Liberalizing Finance in Interventionist States. Ithaca: Cornell
University Press.
"The Mexican Sting" [editorial]. 1998. Wall Street Journal (21 May), A16.
"Mexico to Bail Out Its Biggest Bank." 1995. New York Times 145 (16
December), 40.
Miller, John H. 1995. "Mexico's Latest Bank Bailout," Wall Street Journal
(21 December), A9.
Millman, Joel. 1998. "Drug Charges Hurt Mexico's Bid to Lift Bank
Supervision," Wall Street Journal (21 May), A10.
"No end to the burden? Mexico's bank rescue: An expensive bank bail-out
has become Mexico's biggest scandal, but the wrong lessons are being
drawn." 1998. Economist (July 25), 72-73.
Passell, Peter. 1995. "Two Views of the Peso Bailout: Wall Street vs.
Main Street," New York Times 144 (2 February), A12.
Preston, Julia. 1998. "$62 Billion Bank Bailout Plan Stirs Critics'
Outrage in Mexico," New York Times 147 (31 July), A1, A6.
Robinson, Edward A. 1998. "Why you shouldn't bank on Mexico," Fortune
138:3 (3 August), 272.
Rosenzweig, David. 1998. "Mexican Banks Indicted in Drug Money Probe,"
Los Angeles Times 117 (19 May), A1, A28.
Sanger, David E. 1996. "Mexico Says It Will Repay $7 Billion To the
U.S.," New York Times 147 (26 July), D1, D7.
Schneider, Ben Ross. 1997. "Big Business and the Politics of Economic
Reform: Confidence and Concertation in Brazil and Mexico." In Sylvia
Maxfield and Ben Ross Schneider, eds., Business and the State in Developing
Countries. Ithaca: Cornell University Press, 191-215.
Smith, James F. 1998. U.S. Arrests in Bank Probe a Black Eye for Mexico,"
Los Angeles Times 117 (20 May), D1, D15.
Snider, Lewis W. 1996. Growth, Debt, and Politics: Economic Adjustment
and the Political Performance of Developing Countries. Boulder: Westview
Press.
Stallings, Barbara, ed. 1995. Global Change, Regional Response: The New
International Context of Development. New York: Cambridge University
Press.
Taylor, Robert. 1998a. "The next generation," Banker 148:864 (February),
64-65.
____________. 1998b. "Bumpy road to recovery, " Banker 148:870 (August),
51-53.
Torres, Craig. 1995. "Mexico Will Buy Banamex's Bad Loans; Move to Help
Biggest Bank Underscores Financial System's Crisis," Wall Street Journal
(15 December), A10.
____________. 1998a. "Mexico's Banking System Is Having a Revival; Loan
Demand Rises Among Businesses," Wall Street Journal (28 January), A12.
____________. 1998b. "For Sale in Mexico: $2 Billion in Bank Assets;
Auction by Bailout Fund Would Be the Biggest In Years, Igniting Battles,"
Wall Street Journal (6 March), A11.
Tricks, Henry. 1998. "Mexican opposition takes aim at country's crony
capitalism," Financial Times (10 August), 4.
Tsuyoshi, Yasuhara. 1996. "Estructura y funcionamiento de las sociedades
controladoras de grupos financieros en M=E9xico y Estados Unidos,"
Investigaci=F3n Econ=F3mica 56:217 (July-September), 105-49.
Warnock, John W. 1995. "The Mexican Disaster, " Canadian Forum 73:838
(April), 6-7.
World Bank. 1997a. World Development Indicators CD-ROM. Washington, DC:
World Bank, February.
____________. 1997b. Global Development Finance CD-ROM. Washington, DC:
The World Bank.
____________. 1997c. World Development Report 1997: The State in a
Changing World. New York: Oxford University Press.
Zysman, John. 1983. Governments, Markets, and Growth: Financial Systems
and the Politics of Industrial Growth. Ithaca: Cornell University Press.