by Luis L. Lozada
Contributing Writer
The process of globalization in recent times has been equated to mean the triumphant victory of capitalism as the sole source for economic prosperity and equality for the developing world. The common agreement is that globalization whether good or bad is indispensable as the world precipitates into greater integration. The multiple processes of globalization (economic, social, technological, and cultural) aid the economic development of a nation if managed correctly, according to Nobel Prize winning economist Joseph Stiglitz. The discontent arises between the great fanfare of globalization and economic realities of stagnation, bank crises, and default. For Stiglitz, the source of the problems is the draconian policies of the International Monetary Fund (IMF) and other international organizations. The IMF pushes, what Stiglitz, calls “market fundamentalism” policies that benefit the developed world and disregard the role that economics play on society; as a result, these policies undermine developing economies.
The bank crisis in the early 1980s prompted Mexico to adopt free-market policies that valued austerity and the movement of capital to ensure economic confidence and stability. However, rapid economic liberalization without safeguards and elastic institutions led the economy towards increased exposure to risk.
Inception of the North American Free-Tree Agreement (NAFTA) in 1994 amounted to deregulation, increasing capital volatility, and mobility. Currency speculators traded and bought various national currencies across the globe, forming a portfolio of investments that sought the highest level of return, regardless of the long-term effects that it might produce in a country. As a result, deregulation and speculative foreign capital flowed to Mexico due to high rates of return on government securities and industrial investments. The change in trade policy allowed for 65 percent of U.S. goods to become duty-free immediately or within the next five years. However, the massive inflow of capital caused Mexico to increase a trade deficit of 7 percent of GDP along with Mexico’s external debt of 60 percent of GDP.
The political climate during this crisis complicated the rosy image of NAFTA. The year 1994 was an election year. The assassination of Institutional Revolutionary Party (PRI) candidate Luis Dolando Colosio and the Zapatista uprising both morphed optimism into instability, leading towards a decline of foreign funds due to fear of insolvency. Investors wanted to believe that the peso would appreciate, and in turn, increase the value of their various investments. However, prospects of fear, political instability and overbearing belief in NAFTA left them to realize that their investments in reality were worth of little value. The election of Ernesto Zedillo of the PRI party in 1994 opened the way to loosening monetary policy and tesobonos (short-term dollar debt).
The Bank of Mexico had purchased high amounts of tesobonos; the outstanding cost of tesobonos was twice the central bank’s reserves, resulting in capital flight and external debt. The government was unable to support the peso in the foreign exchange market and allowed the peso to float in 1995. The peso went into free fall, losing half of its estimated value. As a result, the market would not recover for another four years.
Without carefully managed control and maintenance of the national currency, a country is threatened with losing its political and economic sovereignty. Widespread depreciation of the national currency led to loan losses, resulting in an extensive wave of Mexican banks failures. The IMF applied structural adjustment programs on the Mexican economy to give confidence to foreign investors and governments that Mexico will be able to repay its outstanding loans. As often is the case, the IMF policies privileged wealthy patrons and foreign governments as opposed to the needs of the people and the health of the economy. The bank bailout cost the taxpayers 20 percent of GDP. However, in a twist of fate and monumental irony, Mexico experienced a shift in its balance of trade with the U.S. from a deficit of $20 billion in 1994 to a surplus of $7 billion in 1995, the year following the peso crisis.
NAFTA was a mixed blessing. Under the treaty, U.S. banks could open branch offices and U.S. citizens could invest in banking and insurance within Mexico. In addition, growing trade with the U.S., the start of more exportation and manufacturing at the northern states of the country. However, absent on the agenda was any mention of labor; NAFTA neither specified any provisions of labor nor addressed immigration from Mexico to the U.S., a negligence that would create a massive exodus of Mexican labor to the U.S. In sum, trade liberalization resulted in unemployment for workers in low-productivity occupations.
During Mexico’s 2006 elections, Felipe Calderon from the National Action Party (PAN) claimed victory. Mexico was undergoing massive migration from rural areas to cities, giving birth to the expanding informal economy. Economic growth from free access to capital and greater freedom allowed Mexico to experience a boom in production, which benefitted the new emerging middle class.
As Mexico began to revitalize its economic production to curb the problem of unemployment, the 2008 financial crisis occurred. In 2008 to 2009, 80 percent of all Mexican exports traveled to the U.S., but customers were not buying them. Rapid privatization from the 1980s to 1990s reduced the burden of spending placed on government. The wave of neoliberalism favored large corporations, inhibiting competition as well as the necessary supervision of labor standards. Mexico weathered down the 2008 crisis and is now experiencing economic growth once more. Calderon provided financial stability, expansion of health services and access to consumer credit to the wider population. However, pervasive poverty continues. Strong institutions, smart government intervention, and an end to political corruption are three requisites for Mexico to leave the shadow of its past and promote an agenda of economic growth, which means abandoning the neoliberal dogma. Some have argued that NAFTA did very little for economic development at local chains of production because of unskilled labor population, imported assembly parts, and global suppliers. The 2008 recession caused a 6.1 percent contraction of the economy. Further criticisms against NAFTA include mixed economic growth, lower real wages, and the lack of change for poorest segments of the population. Inequality and poverty have both increased as a result since NAFTA. The real irony of this entire experience is that real wages have declined steadily while trade has increased dramatically.
Investments are desperately required to transform Mexico into a truly modern nation. Education and infrastructure are two areas that eventually need investment. One-fifth of Mexico’s workers are in the agricultural sector and 75 percent of poverty is from rural areas. Unless Mexico turns away from neoliberalism in the form of deregulation, low government intervention and favoring large businesses, inequality will continue to balloon, meaning that poverty will not decline, but increase in the following years if it is not addressed fully.
Facts and Figures from American Journal of Sociology, Manias, Panics and Crashes: A History of Financial Crises by Charles P. Kindleberger, Development and Social Change: A Global Perspective by Philip McMichael, Modern Latin America by Thomas Skidmore, Fair Trade for All: How Trade can Promote Development by Joseph E. Stiglitz, Globalization and Its Discontents by Joseph E. Stiglitz, and Mexico: Democracy Interrupted by Jo. Tuckman.