Mexico: The Remaking of an Economy.

This relatively short book attempts to analyze and interpret Mexico's difficult process of adjustment during the 1980s and its apparent economic turnabout in the early 1990s. Although the book was finished less than two years ago, many of its key observations and conclusions have been rendered invalid in the wake of Mexico's recent political and economic events. At the time of its writing, Professor Lustig observed that Mexico had discarded the import-substitution industrialization model that had characterized its post-World War II development, and embraced (perhaps too eagerly it now seems) an open economy-laissez faire model prescribed by the IMF and World Bank. By no means alone, Lustig expected that the signing and passage of a North American Free Trade Agreement (NAFTA) would presage Mexico's ascension into the exclusive club of politically stable and economically viable countries of the world. Instead, passage of the NAFTA last fall has unleashed a series of highly destabilizing political events, beginning with the new year's peasant rebellion in the southern state of Chiapas (the rebels timed their attack to coincide with the enactement of NAFTA into law) and culminating with the assassination on March 23 of the ruling Institutional Revolutionary Party's presidential candidate, Luis Donaldo Colosio--the first assassination at such a senior level since 1928.

Moreover, contrary to Professor Lustig's economic prognosis and, I may add, that of many other Mexican specialists, the country's mounting political problems have been further complicated by a grim economic outlook brought on by an unexpected and sharp recession. The country's real gross domestic product per capita last year fell by 1.8 percent (the first time since 1988), investment collapsed by an estimated 1.5 percent, and manufacturing employment fell by 4.4 percent. What is particularly worrisome is that this downturn in the economy has occurred at a time when the U.S. economy, Mexico's largest trading partner, is coming out of a recession. To make matters worse, the less than reassuring reaction of the administration of Carlos Salinas de Gortari to the growing political and economic uncertainty has adversely affected financial markets and led to a resurgence of capital flight, thus putting tremendous downward pressure on the value of the peso.

Where does Professor Lustig's analysis and that of many other Mexican specialists go wrong? I think part of the answer can be found in the thoroughly conventional and reductionist approach employed by the author, an approach which leads the author to divorce economic events from their political and social roots, and thus advance less than compelling arguments, particularly in Chapters 1 and 2. More importantly, throughout the book's five chapters, the author overlooks the important fact that there is another Mexico, much poorer, more numerous, and older--a Mexico of subsistence agriculture, landless peasants, and powerful landlords and ranchers--beneath the free-market, modernizing society being fashioned by the current administration of Carlos Salinas de Gortari. If anything, the Chiapas peasant uprising is a painful and stark reminder to the country's leaders that there is a widening divide between rural and urban Mexico--between the country's industrialized north and its mainly rural south.

In Chapter 1, Professor Lustig asserts that the onset of the debt crisis in 1982 and the ensuing economic and financial crisis faced by the nation can be explained primarily by "macroeconomic mismanagement" whose roots can be traced to excessive government spending based on the erroneous belief that "the rise in world oil prices and the availability of cheap external credit would continue". Although no credible observer of the Mexican economy will deny that this was not an important contributing factor in exacerbating the crisis, to render it the sole factor strains the credulity of the reader because it ignores the internal structural reasons behind the Mexican government's decision to turn to external funds as a relatively easy escape valve for dealing with Mexico's growing socioeconomic problems, such as widespread and shocking rural poverty, rapid rural-urban migration, and one of the worst distributions of income and wealth in the developing world.

In this connection, the administration of Jose Lopez Portillo (1976-82), and that of Luis Echeverria Alvarez (1970-76) before him, had tried to raise revenues internally to finance increased spending on economic and social infrastructure, but each time were beaten back by powerful economic and financial interests represented by the Consejo Coordinador Empresarial--an influential business organization. Thus, the Mexican state's decision to turn to foreign banks "flush with petrodollars" in the 1970s stemmed from both internal and external reasons: 1) growing social demands by peasants and workers for increased social and economic services; 2) an inability and/or unwillingness to reform its highly inefficient and regressive tax system; and 3) the discovery of vast oil and gas reserves, whose development and exploitation, enabled Mexican society to avoid temporarily painful solutions to its economic and social problems.

Next, in Chapter 2, Professor Lustig reviews the relative performance of the various stabilization and adjustment measures implemented by the Mexican government since 1983, culminating with the implementation of an incomes policy in 1988 known as the Economic Solidarity Pact. She concludes that the poor performance of the various IMF-sponsored stabilization measures can be traced to economic factors--not political ones; and insofar as these are concerned, they are confined primarily to external factors such as scarce external credit, high real interest rates, and unfavorable terms of trade. Again, that adverse external conditions and the huge reverse transfers of capital they engendered contributed to the country's poor economic performance cannot be denied, but to view them as the binding constraint ignores the damage done to the economy and Mexican society by the ruthless and simultaneous implementation of expenditure-changing and expenditure-switching policies in the form of indiscriminate cuts in government spending, highly restrictive credit policies, persistent devaluations of the peso in real terms, and the freeing of controlled prices for food, housing, and transportation. Inflation was conquered but not before the economy experienced a severe and protracted contraction in consumption and investment levels generated, respectively, by the unprecedented reduction in real wages and the collapse of public investment spending in physical and human capital--the country's future source of income and employment. In fact, it was largely political reasons, such as the upcoming presidential elections of 1988 and the threat of a nationwide strike by organized labor, that pressured the ruling party and the government to adopt an income policy in the form of the Pacto to minimize the damage these economic policies had done to the standard of living and purchasing power of most Mexicans.

What is surprising about the analysis in Chapter 2 is that the author is aware that the social costs of these programs have fallen disproportionately on the poor and working poor. Her review of the social costs of adjustment in Chapter 3, by far the best of the book, carefully documents, through the use of official government sources, the negative impact of these policies on real wages, employment levels, the distribution of income, and of particular relevance to current events in Mexico, the highly detrimental impact of agricultural pricing and output policies on the rural poor. Yet, despite the chapter's strengths in documenting the plight of the poor and working poor, it fails to trace the political and economic origins of these unwelcome trends in Mexican society and, more importantly, how they are themselves the inevitable by-product of the stabilization measures and structural reforms pursued by the Mexican government.

Chapters 4 and 5 deal, respectively, with public sector reform and the liberalization of the country's foreign trade and investment regimes. Although both chapters are largely descriptive in nature, they do a nice job of presenting the relevant economic facts concerning the country's privatization, deregulation, and liberalization movement. Of particular interest to this reader are the author's observations that "the key public enterprises were created before 1970"; that is, before the populist administrations of Echeverria and Lopez Portillo. And later, that "the government knew that privatization was an ideologically and politically sensitive issue--with many sectors of society possibly opposing it". Again, these are interesting and provocative observations, yet they are left hanging in the text without further development in terms of their political and economic implications. That is, what is lacking is an analysis of the political economy behind the country's market-oriented strategy. For example, after reading these two chapters, it is not possible to determine which factions of the Mexican private sector have benefited the most from the country's privatization and liberalization push. Is it the large economic and financial grupos associated with COPARMEX and CONCANACO or the small and medium-sized businesses represented by CANACINTRA? Similarly, no real attempt is made to analyze how these market-oriented reforms have affected the economic position and political leverage of organized labor and peasant organizations vis-a-vis the state.

In summary, this is a book that contains some useful information on Mexico's recent adjustment process and structural reform, and as such it is recommended as an introduction to the economic and social problems facing the nation. However, it does not provide the reader with an adequate understanding of the political and institutional origins of these unprecedented changes, and how they have affected the economic position and political influence of key segments of Mexican society. Nowhere is this failure to bridge the gap between economics and politics more apparent than in the author's premature conclusion that "the Mexican case is . . . a unique example of how adjustment costs can be absorbed internally without serious political or economic disruption".

Miguel D. Ramirez Trinity College