Mexico's Circle of Misery: How U.S. Bailouts Postpone Reform

Jorge G. Castaneda

From Foreign Affairs, July/August 1996

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Summary:  Mexico has suffered through four major crises in the past two decades, but the current round, triggered by the 1994 collapse of the peso, is the most serious. Although Mexico will avoid a social explosion, it will not embark on the thorough reform it desperately needs. The reason: a large, broad minority that depends on the United States and is mainly indifferent to their country's ups and downs, economic and political. Successive American bailouts have spared Mexicans some pain but have also locked in misguided policies and an authoritarian government. Until bold new leaders arise, Mexico is condemned to repeat its sad history.

Jorge G. Castaneda is Professor of Political Science at the National Autonomous University of Mexico. His latest book, The Mexican Shock (New Press, 1995), will be released in paperback this fall.

Since the debacle of December 1994, when the peso collapsed and Mexico nearly defaulted on its debt, the country has suffered a series of blows to its self-confidence and stability. Mexico has been through crises before-in 1976, 1982, and 1987-88-but the current situation is far more precarious. The country is mired in its 15th year of economic stagnation, corruption has reached unprecedented depths, public cynicism about government has grown, and political violence has returned. Mexico was never the paragon of middle-class serenity, well-being, and modernity that its champions abroad claimed, but its social cleavages and tensions are more serious than ever.

Nevertheless, the imminent explosion that many have predicted will not take place. And though optimists have argued that the Mexican economy is back on track and that the overhaul of the political system has begun, the country is not poised for rapid political reform and economic growth. Rather, as long as Mexico delays the changes that will bring prosperity to all, the country will remain stalled, divided between a minority whose lot depends on the United States and a majority periodically buffeted by economic and political crisis. Until a new generation of bold leaders arises, Mexico will simply muddle through, enacting superficial reforms while failing to confront its imposing dilemmas.

Not since the late 1920s has Mexico suffered so lengthy an economic depression. Per capita income is, in constant dollars, lower today than in 1980. Mexicans purchased fewer automobiles in 1995 than in 1981, even though the country's population grew by nearly half during that time, from 66 million to 95 million. President Ernesto Zedillo Ponce de Léon correctly points out that only through sustained economic expansion of at least five percent per year will the standard of living of all Mexicans rise, but the last time the economy grew at that rate for two consecutive years was in 1980-81. Even the most sanguine projections foresee no growth in per capita income during Zedillo's six-year term.

As a result of this protracted economic collapse, income inequality has swelled. In 1984 the top decile received 32.8 percent of national income; by 1989 its share had climbed to 37.9 percent and by 1994, before the current depression, to 41 percent. The fraction of national income going to the poorest half of the population has steadily dropped, from 21 percent in 1984 to 17.5 percent in 1989 and 16 percent in 1994. Excluding Africa, Mexico ranks sixth from the bottom in income inequality, better than Brazil or Chile but worse than Argentina, Venezuela, and Bolivia. Today seven out of ten Mexican wage earners-nine million people-earn $300 or less each month. Thanks to the privatization of state industries and the 1992 reform of the land tenure system, which allowed small landholders to sell their property, inequality of wealth has ballooned as well, even more severely than the disparity in income.

In 1995, for the first time in memory, an economic contraction in Mexico generated large-scale layoffs. The country's true level of unemployment ...

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