Modernization and the patron state

Material Information

Modernization and the patron state Mexico 1970-1994
McGregor, Rob
Publication Date:
Physical Description:
ix, 181 leaves : ; 28 cm


Subjects / Keywords:
Since 1970 ( fast )
History -- Mexico -- 1970-1988 ( lcsh )
History -- Mexico -- 1988- ( lcsh )
Mexico ( fast )
History. ( fast )
bibliography ( marcgt )
theses ( marcgt )
non-fiction ( marcgt )
History ( fast )


Includes bibliographical references (leaves 176-181).
General Note:
Department of History
Statement of Responsibility:
by Rob McGregor.

Record Information

Source Institution:
University of Colorado Denver
Holding Location:
Auraria Library
Rights Management:
All applicable rights reserved by the source institution and holding location.
Resource Identifier:
50740573 ( OCLC )
LD1190.L57 2002m .M47 ( lcc )

Full Text
MEXICO 1970 1994
Rob McGregor
B.A., Whitman College, 1979
A thesis submitted to the
University of Colorado at Denver
in partial fulfillment
of the requirements for the degree of
Master of Arts

This thesis for the Masters of Arts
degree by
Rob McGregor
has been approved
Mark Foster
/!rPi< P ! ? Date
James Whiteside

McGregor, John R. (M.A., History)
Modernization and the Patron State: Mexico 1970 1994
Thesis directed by Associate Professor Michael Ducey
In the 1930s, in the aftermath of revolutionary violence and political
instability, Mexico formed the inclusive-authoritarian political model that would
endure for the rest of the century. The new political model incorporated Mexican
citizens into official sectors, and the state adopted a patronage relationship with
these sectors, acting as arbiter and protector of their interests. This political
structure resulted in the use of economic rewards to maintain the states political
legitimacy. The government directed Mexicos economic development for the
remainder of the century. The development model centered on the government
investment in industry, expansion of state enterprises, and protective tariffs and
subsidies. The economic benefits promoted loyalty and political consensus.
When the economy collapsed in 1982 and the resources for political co-
optation were spent, Mexicos presidents had to devise a new basis for
maintaining political legitimacy and power. What followed was a profound
transition in economic and political policy. In 1982 Mexico began to move away
from its reliance on tariffs and subsidies, and toward a private sector-led model.
In a complimentary process, it moved away from consensus politics to a more
pluralistic system. This is a study of that transition, starting with the expansion of
the state and breakdown of the political consensus in the 1970s. By the end of the
Salinas de Gortari administration in 1994, the state had abandoned many of its
protectionist economic policies and patronage responsibilities. In doing so, it
moved away from the a planned economy to a more neoliberal economic model,
and away from the hegemonic system of government to one that was pluralistic, if
not entirely democratic. I propose that neoliberal economic reform and democracy
were related components of an agenda of modernization, and that the two
advanced together.
This abstract accurately represents the content of the candidates thesis. I
recommend its publication.

My thanks to my advisor, Mike Ducey, for his guidance and encouragement
during four years of study. My personal library has grown along with his ever-
expanding list of recommended readings. It is a reflection of his genuine curiosity
about all things, and of his love for Mexico.
My thanks to Mark Foster for numerous gems of advice, including the admonition
to put road signs in my papers, and to write with the reader in mind.
A special thanks to my wife, Ahime Aguilar McGregor, for her help in finding
and translating original sources, and for her love and patience.

List of Acronyms...........................................ix
1. INTRODUCTION.............................................1
The Stolen Election of 1988.........................4
POLITICAL MODEL.........................................11
The Inclusive-Authoritarian State....................14
Clientism and Productive Inefficiency................18
\_3. THE ECONOMIC MODEL.......................................24
Protectionism and State-led Development..............26
The Influence and Control of Labor...................36
The Influence of Business and the Professional Class.42
POPULAR DISSENT.........................................50
The Expansion of the State...........................59
*Jhe Oil Boom................................... 67
' The Debt Crisis;............................. 68

The IMF and Domestic Policy.........................70
5. COLLAPSE AND TRANSITION................................77
Capital Controls and a Crisis of Confidence.........79
Austerity and Reaction..............................84
Privatization and the Confrontation with Labor......91
The Consequences of Modernization................103
The Defection of the Left..........................112
The Rise of the Tecnicos.......................... 122
Globalization and NAFTA............................126
Pronasol and the Reduced Patron State..............133
7. DISSENT AND POLITICAL REFORM..........................139
Internal Reform the Party Assembly of 1990........150
^ 8. THE FUTURE: A MEXICAN DEMOCRACY.........................161
ENDNOTES ...................................................... 168

Cash Crude Oil

Mexico: Economic Statistics 1973 1993

National Chamber of Industries
Confederation of Business Owners
National Confederation of Campesinos
National Confederation of Popular Organizations
National Commission on Popular Subsistence
National Chamber of Commerce
Confederation of Chambers of Commerce
Employers Confederation of the Mexican Republic
Congress of Labor
Confederation of Mexican Labor
The Democratic Forum
National Democratic Front
National Federation of Workers in the Communications
Federation of Workers in the Service of the State
General Agreement on Tariffs and Trade
gross domestic product
Federal Electoral Institute
International Monetary Fund
North American Free Trade Agreement
National Finantiera (the state development bank)
National Action Party
Pact for Stability and Economic Growth (renamed Pact for
Stability, Competitiveness and Employment in October
Petroleos Mexicanos (the state oil company)
Party of the Democratic Revolution
Institutional Revolutionary Party
Party of the Mexican Revolution
National Solidarity Program
Pact for Economic Solidarity
Mexican Union of Electricians
National Political Electoral System
Ministry of Planning and Budget
Union of Petroleum Workers of the Mexican Republic

This paper focuses on the transitions in Mexicos political institutions and in
the governments economic policies from the 1970s through the end of the Salinas de
Gortari administration in 1994. The first two chapters are dedicated to an explanation
of how the Mexican political system was formed after the 1911 Revolution, and how
its structure reflected Mexican traditions of patron-clientism and authority. Before
describing the events of the 1970s, I feel it is important to describe the foundations of
the Mexican political economy. Mexicos political institutions and economic model
are closely interrelated, and evolved together as a project to establish national
sovereignty and political stability in the wake of the 1911 revolution. The goals of
that project were to establish a strong central government, provide for the peaceful
transition of power, and create a national identity in a historically fragmented country.
The post-revolutionary government established a broad base of support among the
working classes and the peasants, or campesinos, by including them in the political
system through their incorporation into formal sectors. The popular and working
classes gained access to the government through their sector leaders who were
appointed by the government. This institutionalized a method of incorporating
popular groups through officially prescribed channels, and providing them with a
corporate identity in the political system.
Mexicos government has not historically been concerned with openness,
democratic processes or public accountability. After a century of discord and
instability, it was concerned primarily with establishing central authority and the
peaceful transition of power from one presidential administration to another. To that
end the post-revolutionary model relied on the exercise of presidential authority,

limited political pluralism and government by consensus within a group of official
sectors and political elites referred to as the revolutionary family. By formally
including some sectors of society in the policy making process, the Mexican
government fulfilled its revolutionary mandate to represent the interests of the
workers and popular classes, and took the role of broker and peacemaker between
these official groups. Control over economic resources was an essential feature of this
model, as it allowed the patronage relationship between the regime and society to
function as a stabilizing mechanism in the absence of democratic political processes.
President Plutarco Calles established the Mexican regime in 1929, but
authorship of the consensus political model belongs to his successor, Lazaro
Cardenas, who was president from 1934 to 1940. He would establish the system of
corporate representation and the leadership and patronage role of the new
government. That role not only provided the authoritarian features of a presidential
system, but also extended the presidents political authority to economic policy. The
presidents ability to direct economic resources evolved into a nationalist
development project in the late 1930s when Lazaro Cardenas asserted the power of
the Mexican state over foreign interests by appropriating the assets of foreign oil
companies, and making the state the owner of the countrys subsoil resources and of
strategic industries.
Mexican presidents did a remarkable job of directing economic growth and
industrializing their nations economy from World War II through the end of the
1970s a period known as the Mexican Miracle. Making allowances for the fact
that many of Mexicos citizens were separated and marginalized by poverty, culture
or geography, the government also spread the benefits among the peasants, the urban
working classes, the middle class and a rising class of industrialists. Its ability to
produce and distribute wealth was key to the ability of the official party the Partido
Revolucionario Institutional, or PR1 to hold a monopoly on political power for just
over 70 years. The economic model incorporated nationalistic elements. It protected

domestic industry from foreign competition through tariffs, and made the government
the financier and director of industrial growth.
When the economy failed in the early 1980s, it precipitated a political crisis
and challenged the viability of the state-led development model. The response of the
reformist presidents of the 1980s and 1990s to that crisis changed Mexicos political
institutions significantly, and probably forever. The reforms of the 1990s led to the
peaceful transition of power from the PRI to an opposition party, the PAN, in the
2000 elections. When Vicente Fox was elected in 2000, it was the first time an
opposition party candidate had held the presidency since the inception of the one-
party system in the 1930s. It represented the fall of the PRI, yet the triumph of a
system that was deliberately designed to provide, above all else, for the peaceful
transition of power between regimes.
Mexico's economic development model has been a direct reflection of the
country's political model, and consequently, both the economy's successes and
failures have had political origins. Consequently, the transitions of the economic
model and political reform in the aftermath of the financial crisis of the 1980s were
inextricably linked. When the Salinas administration took office in 1988, the country
had suffered six years of painful austerity measures, and the regimes legitimacy had
been undermined by the fraudulent election that put Salinas in office. In a time of
crisis the new Mexican president acted boldly to liberalize the countrys economic
model, abandoned important elements of Mexicos import-substitution policies, and
signed a free-trade agreement with the U.S. and Canada. To help restore the regimes
legitimacy in the eyes of both the Mexican voters and Mexicos trading partners,
Salinas relaxed the ruling partys control over the electoral process and opened the
political system to opposition voices.
With the economic collapse of the 1980s economic policy could no longer be
used to reward Mexicos politically important client groups, and legitimacy could no
longer be sustained by the traditional methods of purchasing patronage. The effort to

secure a new source of legitimacy and political stability led the regime to political
reforms such as an internal reform of the PRI, allowance for greater participation by
opposition parties, and more open and honest elections. Although economic co-
optation and political favoritism have not disappeared as part of Mexicos economic
policymaking by any means, there has been a significant departure from the use of
economic co-optation alone to secure legitimacy and regime stability. Legitimacy has
become more a matter of political openness, fair and competitive electoral processes
and responsible governance.
The Stolen Election of 1988
The PRIs loss of electoral legitimacy and subsequent break with the
traditional political institutions and the entrenched interests that supported them came
with the election of Salinas to the presidency. It was this administration, in power
from 1988 to 1994, that brought sweeping changes to Mexicos institutions under the
slogan of modernization, and the hope of achieving first-world status. Salinas
would integrate Mexicos economy with the world economy and open the political
process in a meaningful way to opposition parties. He entered office after six years of
economic austerity and unpopular to reduce inflation and debt by reducing
government spending and employment. The popular pressures on the government in
1988 were such that for the first time since its inception, the Party would fail to
engineer an electoral victory for its incoming presidential candidate.
There is an intriguing story of the breakdown of the PRIs legendary election
machinery that begins with the events of the election of July 6, 1988 when the
carefully orchestrated process of presidential succession nearly collapsed. It was this
near-breakdown of that selection process on the eve of the transfer of power from
President Miguel de la Madrid to his presidential appointee, that put the legitimacy of
the regime in a state of crisis. The events of the election night would expose the

Partys use of electoral fraud at a time when it faced its most important electoral
challenge, and would subsequently create a split within the Party over electoral and
economic reform. Salinas would use that crisis to make difficult and unpopular
changes in Mexicos economic and political system.
Free democratic elections were among the rights the new Constitution granted
to Mexican citizens, but as with the Constitutions list of economic rights, what was
guaranteed in theory was denied in practice. In practice elections were engineered in
advance by the ruling Party so as to guarantee a sufficient number of PRI votes in a
sufficient number of precincts to keep PRI candidates in office. Working through the
ministry of the interior and the state election commissions, the PRI would simply fail
to purge the names of deceased voters from voter registration lists, and then bring in
people to each precinct to vote in place of those non-existent voters. The whole
system was an elaborate ritual to preserve the fa?ade of a free election, but it was
common knowledge that campesinos and loyal PRI members would get on busses on
election night and spend the evening riding to various precinct polling places to vote.
At each location, a PRI member would issue false identification badges to members
of these floating brigades and they would vote under fictitious names. When
sufficient votes had been cast to assure PRI victories in key precincts, the brigades
would return to the countryside for an evening meal and drinks in appreciation for
having done their part for their government.1
Once the votes were cast, the election process was a more straightforward -
usually just a matter of tabulating and posting the results. Civilian election volunteers
would monitor the collection of voting cards at each polling place. The cards would
be tallied in the presence of representatives from rival parties, and placed in ballot
boxes. The vote totals would be recorded and sent along with the ballot boxes to the
department of the interior in Mexico City, where they would be archived. This raises
the question of why opposition parties acquiesced in a process that was almost sure to
exclude them. The regime would not tolerate a threat to its existence, but it would

bend to accommodate or to co-opt dissent as an alternative to repression. Opposition
parties could influence the regime, though they could not threaten the regime.
Manipulation of elections was a matter of careful demographic analysis
beforehand and a projection of each districts PR] membership. The outcome of
Mexican elections depended on almost perfect knowledge of which districts needed
additional PRI votes in order to achieve an electoral success. They were remarkably
good at doing this, as Jorge Castaneda, author of a book on Mexican presidential
succession, observed:
The authorities the minister of the interior, the director of the National
Voters registry, the director of political and social investigation at the
ministry of interior negotiated the election district by district. Nothing was
left to chance. Attention to detail was deservedly legendary. This and other
factors enabled the PRI to win all elections in which it participated by large
and acceptable margins.2
The PRI had always managed a large majority of the popular vote, and the
Partys vote-gathering and vote-producing machine paid great attention to each
districts PRI membership, and had the ability to calculate the expected vote from
each precinct. Where additional votes were needed, the Party had elaborate and time-
tested mechanisms in place to deliver the extra votes needed for a majority.
Sometimes floating brigades of party loyalists were bussed from precinct to
precinct, voting under different identities each time. Sometimes voter registration lists
were manipulated. Sometimes the locations of polling places were changed at the last
minute. In every case, the electoral outcome was calculated in advance, and every
PRI governor and district representative had a part to play in delivering the expected
results. In order for the system to work, everyone in the Party hierarchy had to do
their part, but in 1988 no one did. Salinass election staff pursued the usual upper-
level contacts without the additional effort and attention to detail that would insure
the precinct-level votes on which the election depended.3 An administrative failure,
coupled with an unexpected level of grass-roots opposition would nearly cost the

Party the presidency, and put its legitimacy in question for the remainder of Salinass
six-year term the presidential sexenio.
The opposition to the PRI in 1988 was more formidable than it had been since
the 1920s. A leftist coalition of parties called the Frente Democratico National
(FDN) emerged to challenge the PRI openly. The FDN was led by Cuauhtemoc
Cardenas, a former PRI governor of the state of Michoacan, and grandson of Lazaro
Cardenas. His coalition won wide popular support in the 1980s by promising a
combination of democratic reforms and a resumption of government spending.
Manuel Bartlett, Salinas de Gortaris campaign manager, had acceded to a request by
the FDN and the more traditionalist Partido Action National (PAN) that election
returns from the Federal Election Commissions new computerized system be
broadcast as they were received. The opposition parties on both the left and the right
recognized that the election of 1988 could be close, and they hoped to reduce the
PRIs opportunity to juggle election returns before reporting them. The computer
system that tabulated the votes from the precincts was installed in the basement of the
Ministry of the Interior, and Bartlett arranged for the election results to be selectively
displayed on monitors at the Insurgentes Sur the offices of the Voters Registry. He
convinced the officials at the Federal Election Commission to release partial returns
for the presidential election as votes came in to Mexico City returns that would be
filtered by Party officials before being displayed. The entire scheme would unfold in
an unexpected way, leading to an election-night fiasco that would leave the incoming
president without a clouded mandate to govern, and the PRI with the legacy of having
stolen the 1988 election.
The government assured rival parties that they would have direct access to
voting results as the ministry of the interior received them. This was not true. Voting
results received by the Federal Election Commission would be fed directly into the
department of the interiors computers, and then a PRI official would feed the results
to monitors set up for the press and the opposition parties. This seemed an adequate

safeguard in case the election returns did not go well for the PRI, but as one election
commission official put it to a deputy minister of the interior, Im going to send
them the most convenient information I get at the SM1PE (National Political Electoral
System). The rest stays here. Youll have a problem on your hands if it doesnt work.
Either theyll turn on the machine and there will be no data, or compromising
information will get out.4 Despite the warning, Bartlett had little choice but to go
ahead with the plan. He had already agreed to the oppositions demand for release of
election returns, and to renege would be a tacit admission of fraud on the eve of a
very important presidential transition. Salinas de Gortari already was saddled with the
reputation of being the architect of Miguel de la Madrids economic policy, and
would also have to carry the legacy of six years of austerity.
When the polls closed on July 6, election returns from the various precincts
began to come in to the Ministry of the Interior, and the officials at the election
commission began releasing data to the terminals at the Voters Registry. At around
5:00 p.m. the first results from the system in the Ministry of the Interior were
transmitted to the monitors in the Voters Registry. The opposition party members
and the press were watching the terminals, believing that they were seeing results sent
real-time through a secondary computer system that collated the data gathered by the
election commission. The PRI was winning by its expected margin when an
unanticipated thing happened. One opposition party member used a password to open
a closed file at his terminal in the Voters Registry, and he accessed the votes from
the losing precincts that the PRI had intended to hide or manipulate prior to release.
The real vote tallies from the losing precincts flashed on the terminals in front of the
press and the opposition party members. Precincts that should have returned solid PRI
majorities showed vote totals indicating that Cuauhtemoc Cardenas was winning.
This was the case in precinct after precinct. Author Jorge Castaneda describes the
events that followed:
Suddenly the screen flickered, and results from the bad precincts in Hidalgo
appeared. The PAN technician printed the list and attempted to get further

information. One of the PRI representatives removed him almost forcibly
from his terminal, contacted de Lasse at the Ministry of the Interior and seven
minutes later the system crashed.5
After the PRI announced that the system had crashed, no more electoral
results were posted. That evening the press and the opposition parties began
protesting that the PRI had reneged on its promise, and was withholding election data.
Bartlett made the decision to release no more election data until he could either
confirm or engineer a PRI victory. As Cardenas supporters launched a demonstration
in the streets outside, Salinass managers spent a long night trying to save the
election. By 9:00 p.m. they knew they had lost Mexico City and the states of Mexico,
Michoacan, Morelos, and possibly Guerrero and Baja California.6 With the flow of
information to the other parties cut off, President Miguel de la Madrid tried to
convince Salinas to go downstairs at PRI headquarters and make a victory speech.
Despondent, Salinas refused.
Miguel de la Madrid later described the events in an interview with Jorge
Castaneda. He said that the PRI party president repeatedly tried to get Carlos Salinas
to go out and announce his victory, as was the custom on election night. Salinas
replied, The problem is I have no grounds to do so. His Party advisor insisted,
saying, Listen, Carlos, this is going to give people cause for suspicion, because the
PRI candidate traditionally appears around 11 p.m. or midnight to proclaim his
victory. If you dont there will be problems.7 Salinas would not leave to face the
press and the television cameras. Finally outgoing president Miguel de la Madrid sent
the PRI president himself out to declare the Partys victory, while the president-elect
remained inside at Party headquarters.
The following day, Salinas appeared in public to announce both his own
victory and, curiously, the end of the era of the virtually single party political
system in Mexico. As he began his speech to the assembled legislators, members of
Cuauhtemoc Cardenass coalition walked out of the Chamber of Deputies in a bold

protest against the regime and the election. With that inauspicious beginning, the
Salinas administration embarked on a series of radical economic reforms that would
end the nationalistic, state-development model as it had been practiced since World
War II. Decentralization of economic power would sever decades-old ties between
corporate political elites and the government, reduce the power of the state
bureaucracy, and lead to meaningful reform of the electoral system. Economic reform
would accelerate the pace of political reform, which had a tentative start in the 1970s
but never seriously challenged the position of the PRI as the dominant party. This
would change in the 1990s, as electoral reform allowed opposition groups such as the
Partido Ac cion Nacional (PAN) and Partido Revolucionario Democratica (PRD) a
greater presence in the government. The reform movement would culminate in the
election on July 2,2000 of the PAN presidential candidate Vicente Fox whose victory
marked the first time that an opposition candidate had been elected to office since
1928.9 To appreciate the significance of Foxs election, one must be familiar with the
political structures that had perpetuated the hegemony of the PRI since the 1930s. In
the following chapter, I will examine the beginnings of Mexicos political model and
the mechanisms that comprised the inclusive-authoritarian state.

The system that endured until 1988 was one that drew on deep historical
traditions of authoritarian government and on patron-client relationships between the
government and its subjects. These traditions had their roots in Mexicos colonial
history, and were an outgrowth of Spains administration of its new colonies and the
plantation or the hacienda economy, which created links of dependency and
patronage between peasants and landowners. To understand the logic of the Mexican
political model, it is helpful to keep in mind the cultural attitudes toward authority
and government created by Mexicos history. Group identity, regional and personal
loyalty, and the expectation of a natural hierarchy of power combined to produce a
political culture, and hence a political system, much different than that of the U.S..
The transition from the colonial order to modem statehood was long and
violent for Mexico. The old patronage relationships broke down in the late 1800s as
the factory and the plantation displaced peasantry and proletarianized the urban
workforce. Under the dictatorship of Porfirio Diaz, Mexicos upper classes embraced
western culture and technology, applying mass-production methods to the mining and
textile industries, and introduced the working conditions of the nineteenth century
factory to the Mexican people. Railroads penetrated the interior of the country,
opening land formerly held by indigenous communities to speculation and
development. The conflicts this generated produced a civil war that engulfed the
entire country between 1911 and 1917, when warring factions agreed on a new
Constitution. Even then, the country suffered sporadic rebellions into the 1920s.10 The
Revolution displaced the landed class with an aspiring class of new landowners that

was mostly native bom and of mixed blood. More importantly, it created the
opportunity for centralization of power and development of national loyalties. One of
the challenges facing post-revolutionary Mexico was to create a sense of national
citizenship to displace regional, personal, and village loyalties. Mexicos
revolutionary leaders struggled for two decades to create a political model that would
include the Mexican citizen and legitimize the authority of the national government.
The creation of that model was an important transition in a century that could be
defined by transitions as Mexico made its way from a rural, agricultural and disunited
country to one that was urban, industrial and unified.
Consequently, after the Mexican Revolution the country faced the task of re-
creating its governmental institutions. Mexicos revolutionary leaders remade the
country in many ways that show they were concerned to remedy the instability that
plagued the nineteenth century. The first reaction to the past was the institution of a
prohibition against the re-election of a president. Francisco Madero insisted on a
presidential term without possibility of reelection as a way to guard against another
prolonged dictatorship, such as that of Porfirio Diaz, or against a battle between
presidential successors and ex-presidents, such as occurred in the years following
independence from Spain. Maderos prohibition on presidential re-election became an
important cultural taboo that was never broken by the ruling Party. The certainty of a
new regime every six years contributed to the peaceful transition of power and was an
important symbol of the regimes loyalty to what one author called the mythology
of the institutionalized revolution.11 The importance of the system of presidential
succession illustrates the priority that Mexicos rulers placed on the presidential
succession mechanism. Maderos campaign slogan, Effective Suffrage, No
Reelection, was stamped on state documents until the 1970s.12
Given Mexicos turbulent past, it is not surprising that regime stability was
first among the revolutionary leaders political priorities. The ability to unify the
disparate elements of Mexican society and incorporate them into the national

government was the final triumph of central authority over regional caudillos local
political strongmen with their own militias. The system was not designed to be
democratic. It was designed to institutionalize the goals of the Revolution: to provide
for a strong central authority and peaceful transition of power. With that mandate in
mind, post-Revolution regimes sought to re-establish a patronage relationship with
the peasants and working classes in order to give the new government a wide base of
popular support. A model that provided for their inclusion in government would be a
remedy for both Mexicos history of political instability and the exploitation of the
Lazaro Cardenas, president from 1934 to 1940, would become the architect of
that model. It incorporated various sectors of Mexican society into a low-conflict
decision making arrangement, presided over by the president. Cardenas created
corporate associations and brought them into a formal political arrangement with the
federal government. To accomplish this, he created the official sectors for the
campesinos, urban laborers and the middle, or popular, classes. He created the
Confederation National Campesina (CNC) to organize and give an official voice to
the countryside. To make room in the government for the expanding urban middle
class, he organized the Federation de Sindicatos de Trabajadores al Servicio del
Estado (FSTSE). He consolidated the urban workers into the Confederation de
Trabajadores Mexicanos (CTM). These associations, or sectors, constituted the only
legal and officially recognized agencies through which various elements of Mexican
society could exercise political power.13 They fostered a corporate identity through a
sense of shared interest among their members, and through a system of appointed
leadership that assured that each sector would speak with one voice. These official
sectors would be officially included in the governments policy-making process, but
kept under the control of the administrative branch, dominated by the president

The Inclusive-Authoritarian State
In the process of organizing labor and the campesinos into official
organizations, the government controlled popular dissent by channeling the political
activities of Mexican citizens through these official sectors. Cardenas restricted CTM
membership to laborers in industry and commerce, creating other organizations for
public employees and peasants in part to check the power of the workers unions. The
FSTSE represented the public sector, primarily schoolteachers and government
employees. The CNC was the organization that represented the rural ejido, and was
intended to provide a base for a rural grassroots democracy, as well as a means of
expressing rural interests at the national level. Membership in the CNC, like
membership in the other sectors, was mandatory, and a system of local, state and
national committees was expected to aggregate and represent the interests of each
sectors constituents.14 What this arrangement implied for individual members was
that there would be a patronage relationship within the sector itself, as the sector
leadership promoted and brokered the interests of the constituents. The institution of
patronage relationships, personalism, and informal access to power were pervasive.
What was institutionalized at the national level was reproduced within the official
sectors, and in state and local government.
This array of organizations would change over time, but formed the basic
constituencies that would vie for influence on public policy or for a share of the
country's wealth over the rest of the century. The military was initially included, but
would later depart from the revolutionary family and remain under civilian control.
Business was officially excluded, but would access the government through unofficial
organizations such as the National Chamber of Industries (CANACINTRA) and the
National Chamber of Commerce (CONCANACO) organized in the mid-1930s.15 The
private sector would influence government policy through these organizations, but
they had no official membership in the revolutionary family. Business would

exercise its influence through informal channels to the state bureaucracy, through
positions on the boards of state enterprises, and through the importance of private
investment to the states development agenda.
This arrangement provided the government, the president and the Party (at
that time called the Partido Mexicano Revolucionario, or PRM) with what one
historian called a consolidated labor backing," and provided a balance for the
influence of Mexicos wealthy families and foreign companies. The fact that laborers
were contained within the official sectors also gave the president "enormous control -
political and economic," over the Mexican labor force.16 The institutionalization of
presidential power produced cohesion among elites, who looked upward to the source
of authority and advancement in the executive branch. The authoritarian relationship
of the president over the official sectors is a phenomenon Mexicans refer to as
presidencialismo}1 It allows the president to be the final arbiter among diverse
interests of the revolutionary family, and so instill some discipline and stability in
what might otherwise be a discordant or even ungovernable system.
Part of the reason for the success of presidentialismo is the institutional
prohibition against reelection. The president is the supreme power for only six years,
and must step down in favor of his chosen successor. This reflects a commitment to
preservation of the office at the expense of any individuals policies, and guards
against a presidential dynasty that would overshadow the office itself. That said, the
powers of that office were deliberately wide and discretionary, allowing the powers
of the presidency to expand with each presidents charisma and force of personality.
For six years, each president was virtual dictator over the congress, the courts, and the
bureaucracy. He was the head of a set of institutions that represented a complex
balance of interests, held together by presidential authority and the rewards of
patronage. Jorge Castaneda described the character of the system as follows:
Neither democratic nor repressive, benignly authoritarian when possible,
selectively and sporadically brutal when necessary, sufficiently mobile and
accountable to prevent elite divisions and schisms, corrupt and well-

entrenched enough to guarantee unparalleled degrees of continuity and
Presidents have wielded their personal authority liberally within the wide
parameters of the system. A remark made to the press by President Lopez Portillo in
the late 1970s illustrates the presidents own view of his authority. The president had
recently fired his Minister of Planning, Carlos Tello because of a dispute within the
cabinet. Tello himself sent a letter to the major newspapers, telling them to play down
the news. Most of them buried the story. One independent paper, Unomasuno ran it in
on the front page.19 When Lopez Portillo was subsequently prodded by the press to
explain the firing, he replied that his action was for the national good. Asked to
elaborate, he said that he was president of a presidential, not a parliamentary, system
and did not have to account for his decisions.20
Even authoritarian regimes require some basis for their legitimacy, however,
and in Mexicos case it was a blend of nationalism and revolutionary symbolism
joined with what Castaneda called an uncanny ability to deliver the goods.21 The
model had to be flexible enough to incorporate dissent and neutralize it through
economic co-optation, conciliation, or, when necessary, repression. This flexibility,
and the benefits of a prolonged economic boom after World War II was what gave the
new regime stability through the remainder of the twentieth century while other Latin
countries saw their civilian governments fall to military coups. In fact, Mexico is the
only Latin American country to avoid a violent change of government since 1920. It
was the regimes adaptability and flexibility in the face of dissent that prompted the
famous remark from Peruvian writer Mario Vargas Llosa that Mexico had evolved
the perfect dictatorship. Vargas Llosa was quoted in Processo magazine in 1990:
The Mexican political system is not democratic lets not kid ourselves. It is
a unique system that has no equivalents in the world; that has managed to
keep a party in power by adapting to circumstances with a versatility that no
other authoritarian system has managed.23

Open conflict in Mexico was synonymous with violence, and the ultimate
objective of the inclusive-authoritarian model was to contain conflict within the
revolutionary family, and under the control of the president. A corollary objective
was to insure the peaceful transition of power between presidential administrations.
Once a president left office, he left politics. Mexico would have no presidential
dynasties or puppet presidents in office after Lazaro Cardenas established the
presidential succession mechanism. This process of succession, combined with
presidentialism and prosperity maintained the low-conflict political environment and
policymaking consensus until the collapse of 1982 and subsequent austerity measures
strained the financial bonds that held that consensus together. The consensus model
was built on the historical and cultural traditions already mentioned, but functioned
because of the relationships between the government and the official sectors of
society established in the 1930s. Professional politicians and bureaucrats filled the
role as intermediaries between the official sectors and the government, and exercised
their power to perpetuate the system that rewarded them. As arbiters of the
governments interest (and their own interests) these bureaucrats handled the process
of negotiation, compromise and reward that was the glue that held the policy
consensus together. The president and his top official were engaged in a constant
effort to maintain unity and keep any one member of the revolutionary family from
becoming so dissatisfied that it would jeopardize the stability of the system itself.
This explains the conceptual workings of the model, but the concept of reward
and punishment in return for loyalty was a complex one, and relied on the
government bureaucracy for its implementation. The heads of the organizations that
represented labor, the campesinos and the middle classes as well as the business
community relied on their relationships with the government bureaucracy to
negotiate for benefits and policies in their favor. This gave Mexican governors and
bureaucrats the power to reward and punish according to their position in the
government hierarchy, and made the patron-client relationship between society and

government reliant upon these administrative actors. Political access to the
bureaucracy was the first resort to secure union recognition, licenses, enforcement of
a contract between a union and a company, and generally speaking, to access
government funds. The bureaucracy perpetuated its role in economic affairs as a way
of pursuing its self-interest. In the following section, I will examine how the
bureaucracy functioned as an intermediary between the government and the popular
groups, and how this produced a rentier ethos within the government offices.
Clientism and Productive Inefficiency
The study of how people rise in a bureaucratic state to positions of power is a
matter of the institutional workings of an authoritarian regime. If one does not attain
power through popular vote or from military means, then how is it done? Political
power is unequally distributed in any governmental system. The important
differences are in how individuals acquire positions of authority and how they use
that authority. In Mexico power derived from distributive methods of co-optation
rather than on democratic processes or institutional loyalties, and this linked political
authority to the ability to offer economic rewards. As Mexico's economic
development model matured, it took on a paternalistic character that was a direct
reflection of the of the country's politics and culture. Consequently both the model's
successes and failures have had political and historical origins.
The patron-client relationships built into the political model intruded into
economic policy in the form of protectionism and state financing, as mentioned
above. Unfortunately, the degree of economic power in the state bureaucracy creates
another form of intrusion into political life, and that is the organized attempts to
manipulate or avoid the law by buying the favor of those who control the
bureaucracy. As authors Roberto Newell and Luis Rubio put it, the federal
bureaucracy acquired such political and economic strength that no power could be

carried out without its support.24 By the 1960s the political bureaucracy had become
a formidable power base, and could influence political leaders through their influence
not only in management of public enterprises, but also through their control of the
media. The wider the authority of individuals in the government, the more arbitrary
and boundless are these intrusions. In the absence of institutional accountability to the
Mexican public interest, the system functions largely on the authority of political
elites and bureaucrats. This is an institutional problem, and not a unique aspect of
Mexicos culture. In any system the absence of a free press, or of constitutional
restraints, or of courts that function as a check on executive power, the opportunities
for self-enrichment or abuse of power expand to accommodate personal ambition.
Privileged groups usurp the public interest and subvert the efficient functioning of the
Conversely, a government that is strictly limited to its constitutional actions
cannot bestow many favors. The favor of bureaucrats in such a limited system would
not be worth buying! The inability of the Mexican system to function in an
impersonal manner meant that it fostered inefficiency and self-dealing rather than
public accountability. As governments economic responsibilities became larger and
economic resources scarcer, the problem of self-dealing and inefficient use of public
money would become more acute. Eventually, the issue of corruption and misuse of
resources would have to be addressed by reducing the power and size of the state
itself. Putting control of money and the economy outside of the hands of the
bureaucracy would become an argument for neoliberal reforms in the 1990s.
Personal relationships between presidents, cabinet ministers and heads of
labor unions were an important factor in public policy. The way a minister or member
of Congress might vote depended on friendships, alliances with powerful figures, and
allegiances that went beyond party or philosophical loyalty. In this respect Mexico
was not unique, but the degree of personalism was remarkable, and gave personal
relationships with important actors in the government tremendous weight. Personal

loyalty and reciprocal reward is the glue that holds a patron-client system together.
This is a universal quality of such systems, whether one is speaking of colonial
Mexico, contemporary Latin America, or of the immigrant wards in early twentieth-
century United States.
This phenomenon of the rise of a self-interested state bureaucracy as its own
client group was an unforeseen outgrowth of the states revolutionary mandate. An
unfortunate byproduct of this political culture was the lack of real accountability to
the intended beneficiaries of public policy, and the fostering of a rentier ethos
among government functionaries. A rentier ethos is an acceptance of careerism and
self-interest over institutional goals. In a self-interested bureaucracy, individual career
interests supercede organizational priorities or client group interests. In addition to
using the political system as a method of disbursing benefits to client groups in return
for political patronage, the rentier ethos within the bureaucracy encouraged inefficient
use of the states resources as individuals within the system enriched themselves at
public expense. This patron-client tradition and the inefficient use of resources that it
fostered would eventually create conflict between the Mexican governments dual
role as national capitalist state and patron to the bureaucracy and popular sectors. As
James Cypher, an economics professor at Cal State University, notes in his book on
this subject, the wealth-producing agenda of the capitalist state did not integrate
successfully with the old rentier ethos of the hacendado!merchant capitalist era of
colonial times.25
According to Cypher, the conflicting elements that the new system brought
together were not just elites versus the "folk," or capital versus labor. He introduced
the concept of the state bureaucracy separated from its legal mandate, and forming
relationships of self-interest with elites of the private and public sectors. These elites
were interest groups whose interests were in conflict with both labor and the private
sector at different times, and over different issues. Cypher argues that when the state
became the agent tor industrialization, it incorporated diametrically opposed

objectives of growth and efficiency against careerism and the purchase of patronage.
This contradiction undermined the states project for modernization and growth by
misdirecting resources toward consumption and subsidies for client groups rather than
for new technology and infrastructure. At its root was unofficial access to the
government by labor and private-sector elites who supported patrons in the
bureaucracy in exchange for these favors. The phrase Cypher used to describe the
effect of the rentier ethos was "parasitic opportunism," which was a byproduct of the
processes involved in informal relationships, informal channels of political influence
and self-interested behavior on the part of public officeholders. Cypher notes that
"rentier" processes pre-dated the revolutionary model, and incorporated some of the
colonial political culture regarding the use of the state for personal gain:
The state itself became a new avenue for the rapid accumulation of
long as high-level functionaries were discreet, corrupt practices were greeted
with a nod and a grin. Along with the old rentier elements in banking,
commerce, and landholding that were never totally vanquished, a new stratum
of rentiers emerged... within the interstices of the state.26
A feature of the politicized economic model that added to this problem was
the phenomenon of amiguismo, or helping oneself and one's friends at public
expense. This was a benefit of state service for those who were highly placed, and
could divert state funds even borrowed funds for personal favors or personal use.
This, said Cypher, was "the essence of the rentier ethos" to appropriate rather than
to produce wealth.27 This ethos was not just a matter of corruption, but a logical and
natural extension of the undisciplined pursuit of short-term political goals at the
expense of long-term economic policies. It was a byproduct of the absence of
systemic safeguards that that protect the public interest. It undermined the premise
behind structuralist development theory that access to capital and technology would
naturally translate into rising productivity and increasing value of industrial output.
Many of Mexico's subsequent economic failures were the result of policies
formulated to appease political interest groups, policies that were reactive and

arbitrary, or policies that simply served the interests of short-term political stability.
These factors introduce the concept of unintended consequences in the
implementation of development theory: specifically, that the application of
structuralist development theory becomes distorted by the development of the "rentier
Personalism and patron-clientism functioned in an environment that depended
on personal loyalty rather than loyalty to ones office, or the institution, or larger
principles. It functioned in the absence of public scrutiny or a system of internal
regulation. Consequently, it had the predictable result of encouraging productive
inefficiency and corruption of public officials. The practice of asking for or offering
mordidas, or bribes, in an effort to get permits or other government action is a
symptom of an inefficient public sector. In fact, patron-client relationships can only
thrive in an inefficient public bureaucracy, as in a system that functions efficiently
bribes would be of only marginal value. The U.S. had a similar problem of public
accountability from public officeholders until it began to address it in earnest with the
progressive movement of the ea; ly 1900s. Mexico had no such movement, and did
not break from colonial patterns of personalism in governance. Bribes for
accomplishing a task quickly, or for permits or licenses supplement the incomes of
officeholders who see self-enrichment as a privilege of public office. Of course, this
expectation further separates the bureaucrat or politician from his or her constituency.
Clientism and personalism work in favor of the interests of individual networks and
to the favor of superiors over the interests of the public.28
This discussion of productive inefficiency highlights one of the important
distinctions between enterprises run for public welfare purposes and those run for
private profit. Inefficient offices, as Peter Smith uses the term, lack safeguards to
make them accountable for their results. Consequently, they permit the functionaries
in charge to decide which jobs will be done, and to do those jobs on the basis of
personal favoritism and to extract concessions for themselves in return. State

companies in Mexico tended to be run to maximize employment and provide
opportunities for economic rewards to relevant political groups. As Smith put it, a
central function of the state, since the 1950s, was to serve as an employment center.
This was evident even before the unprecedented expansion of the state during the
1970s. Between 1956 and 1972, positions in the federal government nearly doubled.29
1 should note that the increase in the state bureaucracy was a logical consequence of
the expansion of the states responsibilities, and does not by itself support the premise
that increased employment was synonymous with a rentier ethos. That premise is
supported by the dramatic expansion of the state in response to political, rather than
economic or managerial criteria. That would be a feature of the 1970s as the state
responded to popular dissent and the student protest movement.
Despite its inefficiencies, the post-revolutionary model succeeded as a means
of peaceful transition of power for the remainder of the century, and fostered an
economic development model that was quite successful for over 30 years. Due to the
political successes of the inclusive-authoritarian model, Mexico's leaders were able to
focus on economic growth without the distraction of maintaining peace or the threat
of dictatorship. The result was that the "revolutionary" government focused on
economic development and became directly involved in a growth-oriented economic
program to modernize industry and infrastructure. The popular-sector consensus built
into the ruling party allowed the government to pursue a balanced economic program
of growth and distribution until the 1970s, when economic policy became so
politicized reactive to political pressures that it produced a debt and inflation
crisis and destabilized the regime.

The connection between economic growth and regime stability was
established early on, and recognized as an integral part of the patronage model.
^/Successive presidential administrations used the resources of the state to promote
Economic growth through finance, tariff protection and subsidy. Distribution of
government benefits has been key to the stability and popularity the Mexican
government has enjoyed for much of the 20Ih century. Economic growth allowed
successive regimes to fulfill patronage responsibilities to the official sectors as well as
to modernize and industrialize the countrys economy. These relationships implied
economic and political reciprocity. Popular groups, as well as business, could expect
the state to consider their interests, and in return would accept the low level of
political participation and dissent allowed by the presidential system. Dependence on ^
the state, and particularly on the president, involved a surrender of decision-making
power and political autonomy in exchange for shared economic benefits and a
predictable low-conflict political environment. ^ _ ..
From this relationship presidential power naturally grew to encompass
economic affairs. State ownership of key industries complimented state control over
credit and spending. By holding the reins of the economy, the government was able to
deliver jobs to labor organizations, land and subsidized inputs to the campesinos,
government jobs and advancement to the popular sector, and subsidies and low taxes
to the business community. This economic power was displayed at the local level by
characterizing government services as gifts from local and state authorities, or even
from the president himself. Completing a housing development, building a bridge, or
paving a road might be celebrated at a public rally where high-ranking dignitaries

such as the mayor or governor would officially gift the competed project to the
locality.30 The result was the perpetuation of the myth of the revolutionary
government as patron to the poor and popular sectors.
The states role in promoting economic growth began as a nationalist program
to assert national authority and ownership over oil resources and strategic industries.
In 1938 President Lazaro Cardenas nationalized the oil companies and subsurface
rights, and created the state enterprise Petroleos Mexicanos (PEMEX).31 Petroleos
Mexicanos was Latin Americas first integrated state oil exploration and refining
company. It was created with the explicit purpose of increasing oil production and
goyemmgnt revenue. State ownership of the oil companies was a prelude to the
states new role as economic manager and guardian of national resources. State
authority over economic policy would expand to promote both a nationalistic
program of subsidized growth and distribution in line with revolutionary principles.
The 1936 Expropriation Law expanded the states power over private property, and
particularly over foreign-owned assets. The law legitimized a series of expropriations,
most notably the nationalization of the oil companiesjn 1938, as well as the creation
of public firms injpil, railroad, mining and banking.32 This was the prelude to a larger
nationalist development project undertaken by successive Mexican presidents after
World Warn.
The overriding economic priorities during these years were the assertion of
national authority over industrial development, and high rates of economic growth.
Economic stability was achieved by managing the economy for a stable currency,
controlled government spending directed primarily at infrastructure projects and
subsidized inputs to industry. Economic growth would help Mexico modernize,
diversify its economy, and provide the jobs and benefits that would promote political
stability. The results were exceptional. Despite the inefficiencies in the import
substitution model, the state development project succeeded in shifting the economic
base from hacienda and plantation agriculture to an industrial base. The transition in

the economy provided opportunities to Mexicos laborers and rising middle classes.
From 1940 to 1970, Mexico's economy grew at an average rate of over 6.5 percent
per year.33
The strategy succeeded in large part because of the states role as investor and
development bank. The state had the resources to develop areas of the economy that
were considered strategic or of national interest, such as oil, electricity^ailroads, and_
later fertilizer, steel and some basic industries. State ownership of strategic industries
was congruent with the goal of independence from foreign capital and foreign
investors. The states role as investment banker satisfied the nationalist objective or
Mexican control over Mexican resources, and allowed the state to direct the
expansion and modernization of industry to areas where it was most needed. The
government became a powerful partner and advocate for Mexican firms in
competition with foreign firms. In this way the nationalist agenda complimented the
state development agenda, and supported the growth of the public sector. Initially, the
state saw its role in the economy within a capitalist context, as a partnership between
the government and both foreign and domestic investors. With time the states role
grew to dominate industry and iinance. Eventually, the states presence in the
economy, like the import substitution model itself, would outlive its period of success
and actually hinder private sector growth. Later in this chapter I will examine the
effects of state competition with private enterprise in the context of the rapid
expansion of the state in the 1970s.
Protectionism and State-led Development
The main thrust of the states development project was industrialization, and
freedom from its dependency on export agriculture. The administrations of Avila
Camacho (1940 1946) and Aleman (1946 1952) expanded public sector
investment in manufacturing. Before World War II, Mexico had been primarily a

ruraLcountry^with an economy based in agriculture. Lazaro Cardenas had a vision of
the rural ejido as the foundation of post-Revolutionary Mexico, and to that end, he
initiated the largest program of land reform and redistribution in Mexicos history. By
the end of his presidency nearly 500 million acres about half the cultivable land in
Mexico was in the hands of rural ejidos.34 Together with their consolidation into the
CNC, land reform made the peasants a political force for the first time in Mexican
history, and gave the government a rural constituency. The patronage of the
countryside was repaid in loyalty to the Cardenas regime. The peasants had been
given arms to defend their new lands, and they formed a rural reserve that rose to
defend the central government during the Cristero wars of the late 1930s. After World
War II, the countryside would received less attention, as the urban classes became
more politically relevant to successive regimes. Development policy stressed
industrialization, rather than agricultural reform, and subsidies were increasingly
targeted to the urban sector.
The departure from Cardenass policies did not mean a departure from state-
directed economic policy. President Aleman expanded the states role as investment
banker in the 1940s, and set future administrations on a course of state-directed and
state-funded economic expansion through investment in infrastructure, ownership of
selective strategic industries, and subsidy inputs to private industries. He embarked
on a program of state investment in infrastructure that would put the government in
the role of economic planner and producer of basic commodities through the end of
the 1970s. Aleman created and capitalized new public enterprises and implemented
an import-substitution program. He createdThejrational develogmsnt^an^i^ac/ona/
Financiera (Nafinsa) to direct government resources and foreign investment to
Mexicos public industries and infrastructure. He placed tariffs on imported^consumer
goods in order to provide apjncentive for domestic production, while leaving imports
of capitaLgoods tariff-free, or with relaxed tariffs. These policies inflatedprofits to

both private and state-owned industries, which was the intended effect of protectionist
The state expanded into production of industrial inputs, such as fertilizer,
electricity, irrigation, and petroleum.35 Industrys share of public investment rose
from just over HVpercent in the war years (1941 1946) to an average of 4£Lpercent
by 1970.36 Industrialization encouraged urbanization as people migrated from the
country sidejo the citiestotake jobs, and the ratio of urban to rural workers inverted.
Two-thirds of the labor force worked in the countryside in 1940. By 1970 about two
thirds worked in the cities. The influx of labor and investment funds to the cities
increased industrys percent of the countrys total production from 25 percent to 34
percent, representing an important economic as well as demographic transition for the
country.37 There was a political transition as well, as the rising urban working class
and professionals became more important to the regime a demographic shift that
would influence future government policy and spending priorities.
The combination of state investment and tariffs provided breathing space for
domestic industry to become competitive with industry in Mexicos capital-richl
trading partners. Tariffs pushed prices higher and fueled inflation, but also pushed
profits higher and provided jobs for workers in the vital sectors of the economy.
Meanwhile, the states authority over union leadership and the corporate sector kept
some control over price and wage hikes. During the Aleman administration, the
petroleum workers union, Sindicato de Trabajadores Petroleros de la Republica
Mexicana (STPRM), demanded an!aries and benefits abovejwhat-had
been negotiated with the nationalized company. The union staged a sit-in of the plants
on December 19, 1946, and the government responded by voiding all contracts with
the union and ordering the army to take over the plants. President Ruiz Cortinez
(1952 1958) followed the lead of the Aleman administration with a similar program
of government-managed industrial growth, but had the burden of an unpopular legacy
of inflation and corruption leftby Aleman. President Cortinez instituted price controls

tc^eombat inflation, and.punished violators by closing the offending business. In 1953
over46,00p businesses were temporarily closed because they ignored ceilings on
The takeoff of Mexicos period of sustained growth with low inflation came
from both external and internal factors. During the war years, demand for raw
\exceeded imports in 1942, 1943 and 1945, in spite of growing domestic demand for
both consumer and capital goods. Internally, the government encouraged private
production by granting tax exemptions to 346 new industries, and boosted public
expenditures on industrial infrastructure by over 300 percent between 1940 and
1945.39 Nafmsa contributed to this growth through its activities as an industrial
development bank, and as the economy grew, so did itsjctivities. As one historian
noted that after the war, Nafmsa promoted enterprises in almost every sector of the
Mexican economy. 40 Through Nafmsa the state not only loaned money to sectors"'
that it wanted to develop, such as fertilizers, oil production, and manufacturing, but
also acquired shares in these enterprises, creating a pattern of partial state ownership
in the private sector.
toward the popular and labor sectors. Consequently, the economy was managed for
nationalistic and political goals, principally harmony among the actors in the
revolutionary family. Although many authors emphasize that state development
policy favored business over labor, the states role in the economy also reflected the
interests of labor, as an important constituent group to the government and the Party.
The state balanced its support for domestic industry with its revolutionary mandate
to maintain a patronage relationship with the working classes. Roberto Newell and
Luis Rubio comment:
The extent to which the state came to participate in the economy was
essentially a triumph of the left wing of the party... many investment
materials for war materials, textiles and petroleum boosted Mexicos exports, which
The state balanced its own development agenda by taking the role of patron

decisions, particularly those of the parastatal sector, reflected ideological
preferences and not market failures or needs.41
Mexican presidents used their control over economic policy to do two things:
promote economic growth, and distribute the resulting jobs and wealth among
important constituencies. In this way, the government sought to include politically
relevant sectors of society in the national growth agenda through distribution of
economic benefits or by subsidizing basic services and commodities. The government
nationalized strategic industries and utilities, subsidized food production and
industrial inputs, and used land reform to placate the rural population when food
subsidies worked to their disadvantage. Finally, in response to the growing power of
the private sector, the government incorporated the heads of industry into the state-
capitalist project adding one more powerful interest group to the consensus in the
process. Although never formally included in the revolutionary family, industrialists
exercised influence through personal ties to the bureaucracy, and through
membership on boards of directors of parastatal and private companies.
The growth of the state sector from the 1940s through the 1970s represented a
fulfillment of the nationalist economic development model. It encompassed public
works projects; the nationalization of land; the nationalization of subsurface mineral
and oil wealth and of the foreign-owned oil companies; agrarian reform; and the
creation of "parastatal" companies across a range of industries. Mexico's experience
during the three decades following World War II showed that this model could
function under proper stewardship. Mexico's various presidential administrations,
from Cardenas (1934 1940) to Lopez Portillo (1976 1982), generally held to a^
growth model that emphasized increasing domestic product, protection for and /
development of domestic industry, and distribution of the benefits through thex
political process. The keystones of this model were state-directed investment in the
industrial sector and an import substitution policy of tarjffprotection and subsidies to
domestic producers and manufacturers. This variation on the structuralist model

attempted to combine growth and industrialization through the states role as
financier, but also as owner of industry. The regime used its position as owner and
financier of industry to fulfill its mandate to labor and the popular sectors by giving
labor a voice in the management of state enterprises. Parastatal enterprises became
proxies for the welfare state, and were managed for goals such as job creation and^
wide distribution of income, rather than strictly economic criteria
While other Latin American countries, notably Argentina under the Peron
regime, were investing state funds in expanded bureaucracies, social security and
housing, Mexico was targeting its public investment toward industrialization and
growth.42 Low taxation encouraged private investment in concert with the
governments development objectives. Mexico taxed its business sectorjnorgjjghtl^-
than other Latin countries, but it also spent less in order to achieve its objectives^
partly because private investment followed government incentive^/fjovemment
spending was only 11 percent of GDP in 1950 and just over 12 percent in 1960. Dan
Cothran notes in his book on the factors of Mexican political stability that, Most
Latin American governments at this time taxed and spent much larger shares of their
national income than did Mexico.43 Thapeso wa^peggedJo thejdoJUar untif ljfZ6, ^
which lent stability to the currency, and the governments ability to arbitrate wage^
and production levels helped maintain stable prices.4^This describes the stabilizing
development model of the post-World War II era, with its emphasis on low inflation
andjgrowth. That emphasis would shift toward increased state spending as the
regimes of the 1970s came under pressure to expand the size and activities of the
public sector. The shift in priorities would be reflected in the change from stabilizing
development to a model more concerned with wealth distribution, called shared
CaphaLfbrrnation increased steadily after World War II, rising from abautil
percent of Gross Domestic Product in 1940 to about 19 percent between,L965jind
1970. As develoj^ent'pToceeded, the states role in developmeriTglfadually shifted

from one of investment banker and provider of industrial inputs to provider of
subsidized utilities, transportation and foodstuffs to the consumer. This was an
extension of state authority over the economy that exceeded the theoretical
requirements of protectionist development policy, but complimented the
governments role as patron to the labor and popular sectors of the revolutionary
family. Thejimount of public subsidies to industry and_gonsumers rose from 3.7
billion pesos in 1960 to 16 billionjn 1970.45 The Mexican government reports its
subsidies to industry and its subsidies to consumers together as an aggregate figure,
but according to analysts about half of total government subsidies were directed
toward consumption by 1970.
^^Through both the stabilizing and shared development periods, tariffs on
raw materials stayed low in order to provide cheap inputs to Mexican industry, in
keeping with the structuralist development model. In 1956, 25 percent of imports had
some tariff: bv 1970 almost 80 percent of imports were subject to either tariff or
transition to international competitiveness, in reality few industries made that
transition. This was a deficiency not of the import substitution model itself, but rather
usefulness. This created conditions that would have ironic consequences for Mexicos
development model by the late 1970s. By ironic consequences I mean consequences
that impoverished or reduced the standard of living of the people they were intended
to benefit. In Chapter 4,1 will discuss the rapid expansion of the state during the
Chapter 5,1 will examine how this process led to high rates of inflation, popular
unrest, and finally economic collapse.
only to provide a period during which Mexican industry could modernize and make a
of political factors that encouraged its duration long beyond its period of economic
1970s, and its increasing dependency on oil and debt to fund its social obligations. In

It is important to place Mexicos economic performance during the post-war
period in an international context. Mexico had an average growth rate of over six
percent for over thirty years roughly from the beginning of the Avila Camacho
presidency in 1941 to the end of the Diaz Ordaz presidency in 1970. These years have
come to be known as the Mexican Miracle. That period of growth was not entirely
the result of factors within Mexico itself. Many nations enjoyed a period of post-war
growth. In the post-war period of recovery, the economies of the industrial nations
grew at about 4 percent during the 1950s and at about 5 percent during the 1960s.
This indicates that the years of the Mexican Miracle coincided with an expanding
global economy. That global expansion benefited the commodity-exporting countries
in Latin America and industrial economies alike. The Gross Domestic Product of all
of Latin America grew by about 5.5 percent during theJ960s. Whether growth rates
of six percent constitute a miracle in the context of global expansion is debatable,
but Mexican policymakers can certainly be given credit for seizing the opportunity to
develop and modernize the countrys industrial base. The transition to an urban
industrial society was an important step in assuring Mexicos economic future, and
escaped the limitations of commodity export dependency. Mexicos rate of growth
was still remarkable in that it was above the world average and that internal stability
allowed it to run longer than most Latin American countries. Fronrthe 1970s through
the 1990s Mexicos Gross Domestic Product (in current U.S. dollars) has been the
secondTargest in Latin America, behind that of Brazil. Mexico ranked in the top five
of LatiifAmencanjiations in GDP per capita during thej^me time,period^eyen_._
during the prolonged recession of the 1980s.
"/This is important because it reveals the positive effect that both political
/Stability, the state development plan, and the world economy had on Mexican
\ economic growth. The post-war expansion of the global economy provided an
opportunity for growth that required a development plan aimed at makmg-Mexican
industry self-sufficient. That was the theoretical goal of the import substitution

model. This was a time when economic policies suited to the import substitution
model were put into place, such as monetary controls and tariffs. A stable currency,^
low inflation and tariff protections required complimentary development policies for
Mexicos industry to become competitive and profitable. As those policies_^
succumbed to political pressuresfor increased employment, wages., and .subsidies to
business^Jha^ppeftunityjjassed. The government would increasingly turn to
expansion of unprofitable public enterprises, finanged by debt and oil exports.
Mexico would experience the mixed results that other Latin American
countries experienced with subsidized industry and protective tariffs. The irony in the
import-substitution model as practiced was that during the transition period from
agriculture to industry these countries became more dependent on their industrialized
trading partners for investment capital, equipment Properly
managed, import substitution policies last long enough for domestic industry to
become competitive. Mexican industry subverted the discipline of having to become
more efficient through its patronage relationship with the government. The
government failed in its part by succumbing to political pressures to maintain
subsidies and tariff protection long after their period of usefulness had passed. As a
consequence, Mexicos dependence on foreign capital mdrimports never.yyent away?
-This was evident by the 1970s as the country increasingly relied on foreign
/loans and capital goods imports, and had to allocate its petroleum revenues to pay for
Uhose goods. With the signs of growing debt and federal expenditure, the
administrations of the 1970s continued a deliberate state policy toward protectionism
rather than internal research and development with the aim of making industry
competitive.49 This prolonged Mexicos transition period to achieving independence
and some level of parity with the countrys trading partners. The longer this process
took, however, the greater the public cost to achieve^industriaUzation.
The result of tariffs and internal subsidies was high real cost of production and
low return on capital, masked by state-subsidized inputs, tax incentives, and price

controls. Whatever their deficiencies for social policy, market-based economies do a
better job of allocating resources efficiently than do command economies. That is
surely one of the enduring lessons of the twentieth century. As with the command
economies in Eastern Europe, or the populist economic models of South American
states, the political nature of Mexico's economic model encouraged industry to
accumulate machinery and expand productive capacity without regard for the value
and marketability of the final product.
Weaning domestic industry from the state subsidies inherent in protectionism
turned out to be a problem in practice that was not adequately addressed in either
revolutionary mythology or structuralist economic theory. Even planners at Naflnsa
argued that protectionism should have been a temporary measure, yet it became
institutionalized through political pressure from the industrial elites and the labor
unions that had a vested interest in continued subsidy.50 Consequently, Mexicos
structuralist policies lasted beyond their period of their effectiveness, while the
subsidies and the expansion of inefficient parastatal industries contributed to a
growing budget deficit. When the economy faltered in the late 1970s, it jeopardized
the basis of legitimacy of the regime itself, and brought about a political crisis. The
presidential administrations of the 1970s responded by borrowing abroad and
increagipg-oiTcxports to re-capitalize the economy. These funds provided a short-
lived opportunity to cushion the transition to a market economy, but the funds were
used as a means of financing further expansion of the public sector. Each
administration used oil revenuejmd debt to weather the political storm until the
hoped-for economic recovery. Unfortunately, these policies did nothing to address the
' ' ----- y?
structural conditions that undermined Mexicos economy and political stability. The
political culture of patronage and the structural bias toward clientism and inefficiency
discouraged the difficult choices that could have addressed Mexicos problems early
on. In Chapter 5 I will examine the policy process that brought Mexicos economy to

the crisis point, and forced the state to confront the reality that its patronage
relationship with the popular sectors was unsustainable.
The Influence and Control of Labor
The inclusionary-authoritarian model limited public participation in
government by design. It was intended to foster consensus government by limiting
the public policy arena to official groups, with government-appointed leadership. The
system represented a balance between inclusion, co-optation and repression of
individuals and groups that represented a threat to political stability. Labor was one
such group, and was large and politically powerful enough to require inclusion and
co-optation. The states ability to co-opt labor and the popular sectors by distributing
jobs, salaries and other benefits maintained political stability, but allowed labor a
substantial voice in the conduct of state enterprises. As one historian put it, the state
allowed an inordinate influence of certain labor groups and bureaucratic sectors in
the economic decision-making process.51 This broadened the states constituency, and
de-radicalized popular pressures for economic benefits or political access.52 By
keeping labor and the popular sector within the family, the regime preserved social
stability and the states authority over these groups. The trade-off of politicizing
economic policy was that it reinforced the systemic bias toward institutionalized
inefficiency and self-dealing discussed above. Policies that were intended to
distribute wealth to union and bureaucratic constituencies burdened both private and
state-operated business with extra costs, making it more difficult for them to become
competitive and profitable.
At the same time, protectionism and co-optation of the workers and peasants
were two areas of policy where the interests of the bureaucrats and the private sector
intersected. The state and the private sector shared the same position as owners of
productive assets, although private companies managed for return on those assets,

while the state managed for growth along with many non-economic criteria. Both the
state and industry wanted to protect themselves from excessive demands by labor, the
peasants and the urban poor. The regime dealt with the workers through middlemen
whose careers depended upon their ability to reconcile the demands of their members
with the requirements of the state. The public referred to these co-opted leaders as
c/iarro leadership after the style of one notorious labor union leader who dressed
charro style in cowboy boots. These charro elites supported the state and helped
impose some discipline on their membership in exchange for economic benefits for
themselves and their constituents. Labor unions elected their leaders, but by a show of
hands rather than secret ballot. The incentive to ingratiate with the charro leadership
meant that publicly voting against them was a courageous act, and one that might be
punished.53 Likewise, charro union leaders that failed to successfully mediate the
demands of their constituents could be replaced by the government.
Mexican labor frequently expressed dissatisfaction with the government over
issues that affected them directly, such as wages and benefits, and would threaten to
strike when wages failed to keep pace with rising prices. Aside from the issue of
wages, the political independence of the unions, and the restrictions on workers
freedom to organize were probably the most common grievances. Deteriorating
economic conditions always invited worker unrest, and the loss of real earnings in the
1950s and again in the 1970s generated strikes and demands for removal of charro
leadership when those leaders failed to deliver on union demands. I will discuss the
effect of inflation on wages in the context of the rapid expansion of the state during
the 1970s. Workers resorted to demonstrations and strikes judiciously, as strikes not
called by union leaders were illegal. One example that illustrates the risks of
confronting the state was the election of Demetrio Vallejo to the head of the railroad
workers union in 1958 over wage issues, and he authorized the union to strike. The
government declared the strike illegal, and Vallejo was arrested along with thousands
of other striking workers when the police and the army moved against them. Once

Vallejo was imprisoned, a union head more friendly to the government was installed,
and the opposition movement was quieted.54
The unity of the labor sector had advantages in that it allowed access to the
benefits that came with being loyal clients of the system. One benefit was the ability
of the unions to exert their political influence to raise wages and benefits for their
membership. Charro leaders had opportunities for self-enrichment through
contracting services and goods back to the companies that employed their members.
As with the government administration, charrismo functioned with little or no public
accountability. Laborjeaders in particular abused their positions to extract money arup^
concessions from the government, their industry, and the unions themselves. As an
xample, union closed shop contracts made official union membership a condition of
employment, and so empowered labor leaders to use the threat of expulsion from the
union as a means of keeping workers compliant. This would mean the loss of their
jobs and benefits.
^_^Such a degree of control invited abuse, and union membership was offered to
prospective workers, particularly to temporary workers, in exchange for money,
political support, or for sexual favors if the workers were women.55 This control over
bunion membership gave the charro leadership influence with both the government
and the companies who employed the union workers. Labor union leaders were the
governments point of contact with its labor constituency, and the arbitrators for
union benefits. The influence of these leaders extended to the management affairs of
public and private companies. The unions were able to negotiate generous
collective contracts with their employers because the companies were required to
negotiate with the representative of broad-based unions (the electricians union or the
railroad workers union, for example), rather than negotiate directly with their own
employees. Closed-shop clauses were written into nearly all collective contracts
between public corporations and their workers, preventing the employers from hiring
non-union workers. The employees themselves were not allowed to form unofficial

unions, as this would have diluted the power of the official union leaders. The
influence of labor elites in the system was such that union leaders often purchased
service companies and then contracted those services back to the companies that
employed their members. The contracts were non-competitive and provided the union
leadership with an off-the-books source of funds, which they used both for self-
enrichment and to expand the business holdings of the unions.
Union leaders rose to political positions as mediators between the unions and
the state. They supported and legitimized the state in exchange for a share of
economic benefits, which went to themselves and to union members. Loss of official
recognition for the union would have devastating consequences for its members, as
they could face the alternatives of being replaced or joining an official union in order
to keep their jobs. In order for the union to receive this job protection, it had to be
officially recognized registered with the Minister of Labor. Only one union was
recognized in each enterprise, so the government ministry had the power to, in one
historians words, empower cooperative unions over uncooperative ones.56 This
gave the government reciprocal power over charro leadership, as union recognition
and the appointment of charro leaders was at the governments discretion.
Consequently, when the two sides came into conflict, the government had the
stronger hand.
There is a rather futile debate among scholars s to whether Mexicos
development policy favored labor, or business. This is a false distinction, as
neither labor nor business represented homogeneous groups. Rather, there were
important differences between the actors within the business community and the labor
sector that make it inaccurate to generalize about the interests of labor without
differentiating between unionized, independent or informal workers. There were
corresponding differences between large industries and small businesses that caused
one group to support policies the other opposed. Furthermore, neither the labor sector
nor business interests were treated uniformly, as groups within each sector received

preferential treatment in accordance with their political importance to the regime or
their informal ties to the bureaucracy.
Another reason to reject the dichotomy is that it implies that the state was
under the influence of either the working classes or capital. It is more useful to
view the state as an independent actor, and the bureaucracy as an interest group unto
itself. State policy favored business or labor interests at different times and over
different issues, depending on how each groups demands could be accommodated
into the governments own agenda. That agenda favored growth and development,
but was also concerned with maintaining support among its popular client groups.
The two goals were often in conflict, and consequently policy consensus was really a
result of a continuous process of negotiation and compromise between competing
sectors or groups within sectors, brokered by government agencies or the president
himself. This picture is further complicated by the fact that the government had
divided loyalties as owner of parastatal industries and patron of the labor sector.
These divided loyalties resulted in a complicated and sometimes contradictory pattern
of priorities toward ownership, labor leaders and the workers.
One interesting case that illustrates this complex relationship involved a
dispute over the use of union-owned tankers at PEMEX, the state-owned oil
company, during the 1980s. The union boss Joaquin Hernandez Galicia and other
union officials created a shipping company called Petroflota, and then contracted with
PEMEX to lease tanker space back to the company. At one point, Petroflota carried as
j c -------------
much as 60 percent of PEMEX ojl shipped abroad. PEMEX spent 240 million
/ dollarstoTease tankers space in 1981, 200 million dollars in 1983, and 220 million
dollars in 1985. The company did not release the amount it spent to lease each tanker,
but during this same period of time the number of tankers PEMEX rented dropped
nearly by half from 31 to 16. In 1986, PEMEX terminated its contracts with
Petroflota and began shipping ojHnforeign hulls. Interestingly, PEMEX had its own
fleet of tankers that sat idle during much of this time. In May of 1986 sailors and

oilworker union members tending idle boats broke the story in an open letter to
President Miguel de la Madrid that appeared in Unomasuno magazine. They charged
that PEMEX was spending millions of dollars monthly to rent more than 130 boats,
while their own boats sat idle in the water.58 The PEMEX crews had a financial
incentive to break the story to the press, as they were drawing minimal pay while
their boats sat in the harbor.
In May, 1989, Proceso magazine ran a follow-up story on the diversion of
union funds by the charro leadership, and the lack of accountability by either the
union or by PEMEX for the money spent to lease tanker space rather than use its own
hulls. By 1989, Hernandez was in prison along with a number of other union leaders,
charged by the Salinas administration with crimes ranging from murder to arms
smuggling and tax evasion. Alongside the story of the boat scandal, Proceso printed
an interview with Hernandez in the which the former union boss proclaimed his
innocence and charged that he was the victim of a plot by the government.
Meanwhile, ships owned by PEMEX still sat idle in the water, their crews drawing
minimal pay, while foreign vessels came and went loaded with Mexican crude.
Apparently, the barriers to PEMEX using its own boats were a matter of political or
legal issues between PEMEX and the union-owned subcontractor. Proceso charged
that a war between PEMEX management and the union were to blame for the idling
of Mexican crews. Regardless of the reasons, the cost to the Mexican government
because of the maneuvering of PEMEX and union officials and the inefficient use of
public funds was significant. According to the open letter published by the union
membership in 1986, PEMEX could have saved 500,000 dollarsjunonth bv reducing^
its fleet of leased tankers by just 13 percent.59-------~
The PEMEX story highlights the degree to which non-economic criteria
affected the decisions of parastatal managers. The fact that the discontented
oilworkers took their case directly to the president through the medium of the public
newspapers also speaks to the tradition of state paternalism and control over

economic activity. This pattern would emerge again in the 1990s as workers who lost
their collective contracts under Salinas de Gortaris privatization initiatives would
appeal to the government, rather than company management, either through personal
contacts or through open letters in the Mexican press.
The relations between labor and the state show that one of the unintended
consequences of political domination of the economy was that the state itself took the
position of owner and financier of industry. This had interesting consequences for the
state-labor alliance in the 1980s and 1990s when populist economic policies had to be
abandoned, and labor costs reduced in state-owned industries. Unions found that their
traditional patron was now across the bargaining table, pushing for policies such as
the abandonment of collective labor contracts and the flexibilization of the labor
force. The state was tom between its labor constituency and a pressing need for the
reform and downsizing of the public sector. In Judith Teichman's words, the
governments split loyalties demonstrated a major contradiction of this extensively
public enterprise activity, a contradiction that would set the stage for the states
eventual dismantling.60
The Influence of Business and the Professional Class
The relationship between the state and the popular sectors has been studied
and analyzed extensively, but the relationship between the state and private industry
is less well documented. That relationship was different in that between the state and
labor, as private business was more independent and not formally incorporated, as
were the other sectors. The Mexican economic development model accommodated
private sector interests as a necessary part of the growth and industrialization project.
This raises the question as to whether Mexicos inclusionary political model was
overly influenced by business elites. In truth, the relationship between the Mexican
state and Mexican business has been both symbiotic and antagonistic. There is less

agreement on exactly what the terms were between the state and private industry than
on the states relationship with labor and the popular sector. There is some
disagreement among my sources on this point. Roberto Newell and Luis Rubio
observed that state policy was overly influenced by the left wing of the party, while
author Judith Teichman offers the contradictory observation that, Although there has
been considerable debate over the extent of business influence over public policy, it is
generally agreed that business has not only had a major influence on public policy but
has also been its major beneficiary.61
Although 1 want to avoid presenting this argument in terms of whether labor
or business benefited from government policy, there is a point that should be made
about popular attitudes toward the private sector. The involvement of labor and
government in business through the closed shop, mandatory collective contracts,
wage and price controls, and required benefits reflected a popular attitude that
businesses owed patronage responsibilities toward their workers. Identifying the
actions of the state with the interests of the business class (one should say classes)
ignores the history of government regulations on business favorable to unions,
peasants, and the popular sector. Aside from issues of productivity and
featherbedding, employers were expected to provide housing and educational
subsidies to their workers. Private employers in the manufacturing sector and in
government-owned industries all paid a tax of five percent of wages toward housing
facilities for their workers. There was also a ten percent social security tax, a one
percent education tax, and an eight percent profit-sharing levy in some cases. The
state also required employers to pay a one-month bonus at the end of each year.
Author Susan Purcell addressed the use of the private and parastatal sector to address
social welfare needs in a 1977 essay. In it she provides a summary of government-
mandated benefits:
Those who affirm that a distinct state interest exists therefore base their
argument on the fact that there have been numerous occasions when the
government has implemented decisions that were strenuously opposed by the

private sector. Examples of such decisions include the establishment of
employer-subsidized housing for workers, the implementation of an
obligatory profit-sharing system, the institution of a law requiring
reinstatement of unjustly dismissed workers, the imposition of taxes to finance
rural development, the creation and recent major expansion of CONASUPO...
the establishment of price and rent controls, and the granting of periodic large
wage increases.62
The relationship between the government and the private sector was one of
cooperation, but the interests of the state were primary. Even after the debt crisis of
1982 when the government was perilously short of resources, the state was concerned
not to abandoned its revolutionary responsibilities to the popular classes. A sample
from one of Miguel de la Madrids speeches in the early 1980s indicates that he saw
cooperation with the private sector as a means to fulfill the states responsibilities to
these sectors. He spoke of balancing the interests of the popular classes with those of
the businessmen. Then he made an interesting distinction, claiming that the
government owed its legitimacy to the working classes and the peasants, but that its
positive relations with the private sector helped it carry out the programs from
/ which all benefited.
Appeals to the government for intervention in employer-employee relations
on behalf of workers principally unionized workers reveals the degree to which
the labor sector identified the state as protector of its interests. The negative of that
statement is that it also reveals much about the degree of mistrust of management and
the private sector. The entire structure of relations between the state and the business
community reflected a general mistrust of private enterprise in Mexican society.
Given Mexicos history with foreign investment, this is understandable, and partly
explains the popularity of the revolutionary mythology. The popular mistrust of
private enterprise in Mexico invested the labor and campesino sectors as well as the
bureaucracy with ambiguous feelings toward property rights in general. Cultural
attitudes toward the role of the state as patron of the working classes, ambivalence
toward private property rights, and institutional biases toward self-dealing and

inefficiency had a cumulative affect on Mexicos business climate. By 1975 the
Business Coordinating Council formed a policy group to oppose the Echeverria
governments populist policies, and put forward a statement of principles in support
of private property rights. The council called on the government to divest itself of
some of its enterprises, and to allow greater foreign ownership and investment in
Mexico (ownership of Mexican business by foreigners was limited to 49 percent by
The hostility of popular culture to these ideas was so pervasive that even
traditional allies of the private sector such as the National Action Party (PAN) and the
Catholic Church condemned them. Such was the power of nationalism and the
symbolism of the Revolution just a few decades ago. This is significant because
Mexicos economy would collapse in the early 1980s, and popular attitudes toward
the private sector and the welfare responsibilities of the government would make
orthodox economic reform difficult and unpopular. Eventually, neo-liberal economic
policies and the privatization of parastatal firms would be accomplished through
presidential initiative, and only after a crisis of debt and inflation spurred a reform
movement within the bureaucracy itself.
As an alternative to the dichotomy of labor versus business interests, one
can view favored groups by their size and relevance to the governments agenda of
political stability. Author Peter Smith avoided the business vs. labor dichotomy, and
asserted that middle class interests have been the primary beneficiaries of government
economic policy. His premise is that as Mexico industrialized urban unionized
workers and the middle class became increasingly important to the governments
popular base of support. Consequently they were beneficiaries of public policy.
Daniel Levy and Gabriel Szekely echo Smiths observation that the government has
tended to accommodate middle class interests, certainly over those of the poor and the
countryside. This has been an outgrowth of the relationship between economic reward
and political legitimacy, and is consistent with the position I have expressed in this

paper, which is that the state was an independent actor whose policies represented the
pursuit of its own needs for economic growth and popular legitimacy. Authors Levy
and Szekely comment that, Because of its development model, the regime has more
in common with privileged than unprivileged groups.65 Whereas it is cost effective
to accommodate privileged groups, it is also cost effective to ignore or repress less
powerful ones. Regime stability is not threatened by repression of the poor, small, or
disorganized groups, as it would be with large, well-organized groups. Although
access to the government is theoretically equal among the official sectors, in practice
the more politically relevant sectors have more weight in negotiating their needs.
The states patronage relationship was not directed solely at the peasants or
the working classes. Government subsidies and direct investment in industry acted as
a safety net for failing companies and their employees. One example is Mexicana de
Aviacion, which was privately owned in 1981, but ran deeply into debt as it
purchased new aircraft to compete with foreign airlines on international routes. When
Mexicana could not meet its debt obligations to the Mexican government in 1982, the
government purchased 54 percent of the companys stock, leaving the country
without a major privately owned airline. The government was chief stockholder in
both Mexicana de Aviacion and another debt-ridden government acquisition,
Being part of the business sector alone was not a guarantee of state assistance.
Political connections were indispensable to industries that wanted exclusive
government contracts, subsidized inputs or tariff protection from foreign competitors.
The private sector is not homogeneous, but composed of many competing groups.
The fact that protectionist regulations helped some industries meant that it raised
costs or barriers to other industries. Tariff protection for one company could raise
costs for a Mexican user of that companys products or services. Consequently, tariffs
and subsidies shifted costs and rewards among companies in the private sector, and
did not simply reward the private sector as a whole. While the private sector has often

had an adversarial role with the state, large industries have been co-opted in much the
same manner as labor and the peasantry. When the state embarked on a deliberate
program of economic development following World War II, strategic industries and
businesses with political influence received tax benefits, subsidized inputs for
production, and subsidized credit from the state development bank Nafmsa.
Considering the influence of labor and the popular classes in economic policy,
and the systemic inefficiencies associated with the rentier state, one wonders why the
business community did not push for economic reforms earlier than the 1980s. The
answer lies in the reciprocal relationships that the government attempted to maintain
with all the incorporated sectors of Mexican society, including the business sector. As
the experience of capital flight in the 1980s would demonstrate, the governments
development program was dependent on private investment as a source of capital.
Import substitution, subsidized inputs and low taxes created a protected climate for
much of the business community similar to the protected climate for labor and the
popular sector. Subsidized business was insulated from pressures for efficiency, and
was able to make money by specializing in a small number of products or services
with an artificially high margin of profit. Consequently, many business elites had no
incentive to support economic reform. Riordan Roett, director of Latin American
Studies at Johns Hopkins University, had a harsh description of the effects of
protectionism on Mexicos business community:
Mexicos industrialization policy of import substitution, which was highly
protected by the government, had generated an inbred, uncompetitive, and
influential business class whose interests were best protected by opposing
economic and financial innovation.68
Business exercised influence over politicians through corporate organizations
similar to those for unionized workers and campesinos, but business organizations
were not given official membership in the post-revolutionary government. When the
political model was formed in the 1930s, business associations already existed and
operated outside the government. The Confederation of Chambers of Commerce of

Mexico (CONCAMIN) was formed in 1917, just after the Revolution, as part of the
process of economic reconstruction. By 1941 several national business associations
existed as vehicles for businessmen to organize and influence the government. By the
1980s business conglomerates had formed in steel production, the beer industry and
television among others. Called grupos, these were combinations of individuals in
industry, commerce and finance that worked cooperatively with the government and
prospered from Mexicos lenient tax laws and willingness to subsidize domestic
The state developed a reciprocal relationship with private industry wherein
development of industry was complimentary to the interests of the state, but the new
industrialists were subordinate to the power of the state bureaucracy. Businessmen
did achieve positions of influence in politics, even though the business sector was not
officially included in the revolutionary family. The rise of business elites did occur,
and those elites were able to exert the same pressures on the state for special favors
and access that populist groups and the bureaucracy had enjoyed. The policy of co-
optation of politically important sectors of society benefited capital when the state
needed management and investment for its stabilizing growth agenda. As an example,
business was able to get very light tax treatment for its cooperation in the state's
economic project. During the mid-1950s, "capital's share" of Mexico's income tax
was about 50 percent. This fell to 14 percent by 1966, and the Mexican tax system
came to favor the business elite to an extent that was, in James Cyphers words,
"without parallel among societies with similar goals."70
I am unsure of how Cypher determined capitals share of the tax burden,
and I did not find any support for that figure in statistical abstracts. The Statistical
Abstract of Latin America, published by the University of California at Los Angeles,
does offer an explanation for the source of the states tax revenue if capitals share
was as low as Cypher estimates. The 2001 Abstract lists the central governments
taxes on income, profits and capital gains from 1975 through 1995. That revenue base

accounted for 37 percent of the governments total revenue from 1975 to 1980. It
dropped to a low of 23 percent during the 1980s before climbing back to nearly 37
percent again in 1990.71 The decline in revenues during the 1980s is explained by the
prolonged recession from 1982 to 1988. As for where the government found the
revenue to make up for light taxes on industry, one important source was oil exports.
Another important source was indirect taxes and value-added taxes, which greatly
offset the light taxes on income. Tariffs, sales taxes, import taxes and business
licenses made up half of the states tax revenue in 1970, nearly 60 percent in 1980,
and between 30 and 40 percent through 1997. 72Tariffs and import taxes also
benefited business in a larger context. Domestic business received subsidized inputs
and price protection from foreign competition two key components of the
nationalist development program.
I would conclude that, despite a common agenda of growth, it is a mistake to
suppose an identity of interests between the state and the private sector. Although the
state was an owner or shareholder of many companies, and controlled entire sectors
such as utilities and the oil industry, state policy aimed to accommodate the interests
of its popular base. The state also took its patronage responsibilities to the labor
sector seriously, as this was part of its revolutionary mandate and a component of the
low-conflict political model. Aside from subsidy and regulation, perhaps the most
burdensome aspect of the Mexican economic model to private industry has been the
states presence as a competitor with almost unlimited access to finance. Add to that
the states ability to use police power to enforce its monopoly position, and one can
understand the uneasy relationship between private industry and the Mexican

Political unrest during the 1960s and 1970s influenced the governments
economic policy in ways that turned the state away from the fiscal discipline of the
stabilizing development model, and hastened the financial crisis of the 1980s. As I
mentioned, the economic crisis of the 1980s had political roots, as economic policy
became reactive to popular pressures. Those pressures were for continued state
subsidies, expansion, and tax concessions that could not be sustained except through
borrowing and an over-reliance on oil. In addition to economic demands of the labor
and popular sectors, Mexicos urban middle classes began to press for inclusion in
the political process. This led to increasing criticism of the lack of transparency and
accountability in the electoral and decision-making processes. The regime was
reluctant to tackle these political issues, as they required substantial reform of the
Party apparatus and the institutions built around it. Instead, the government responded
to political pressures by increasing spending and expanding the parastatal sector to
produce more jobs. The Mexican presidents of the 1970s used distributive and
expansive economic policy as a substitute for political reform.
A growing economy helped to hold Mexicos political sectors together as the
revolutionary family became more divided. Ruth Collier, a political science professor
at Berkeley, noted in her book on labor relations with the Mexican state, that when
the import substitution model began to break down, the coalition represented by the
party could not be sustained so easily. Economic policy became more zero-sum and
hence inconsistent.73 Colliers reference to zero-sum economic policy indicates
that in the absence of fresh resources, the states ability to disperse economic rewards

was limited, and therefore partial to the most politically relevant groups. The
relationship between economic and political policy was symbiotic. Political stability
was undeniably tied to economic growth. When growth slowed, political conflict was
a predictable result of an uneasy coalition between factions that had conflicting
Mexico urbanized during the years of stabilizing development, and with
economic growth and urbanization the countrys social structure changed. The
peasantry that had been a pillar of support for the PRI moved in greater numbers to
the city to become wage earners, and formed a large informal working class sector in
the cities that was not well incorporated into the Party. At the same time, middle class
professionals and bureaucrats who were included in the Party through organizations
such as CNOP became intolerant of the governments economic mismanagement and
authoritarian methods. The symbolism of the institutionalized revolution became
harder to maintain as the generation of the Revolution grew old and passed away. The
identification of the Party with the popular and laboring classes became harder to
justify in light of repression of illegal unions and control over the media. Although
protest against the regime during the 1960s was limited, it represented active public
mobilization against the regime for the first time since the Party was formed. The
protests involved mainly students and groups of middle class and blue-collar workers,
and was directed primarily at Mexicos unequal distribution of power.
The urban middle class shared with student demonstrators a concern for
greater political freedom and access as well as for equitable distribution of economic
rewards. The corporatist model had included state employees as the politically
relevant unit of the popular sector, but the urban middle classes had wider interests
than those of the state bureaucracy. Small business and independent professionals
were not formally incorporated into the government, and the urban middle classes
wanted systemic change in the political system, and not simply specific benefits for
specific groups. As author Dan Cothran put it, The urban middle class seemed to

believe that it was not allowed to participate fully enough in politics.74 Actually, the
urban middle classes, along with the rest of society, had a very low level of political
participation. The student movement of the 1960s was a widespread, vocal, and well
organized confrontation with the regime over its monopoly on political power. The
emerging class of urban professionals as well as groups of blue-collar workers offered
support to the student protest movement, turning out for large street demonstrations
and contributing money to student activists who went through the crowds with
collection cans, asking for coins. As the protest movement grew, so did pressure on
the regime to allow more democratic participation.
The government dealt with student dissent in the 1960s much as it had with
labor dissent. At first, political elites attempted to negotiate or co-opt the movements
leaders. Where this strategy failed, and illegal strikes or violence resulted, the
government resorted to repression. As an example, the army broke a railroad strike in
the 1960s, and railroad union leaders were temporarily jailed. Peasant leader Ruben
Jaramillo was murdered.. The government then followed repression with reform. The
labor unrest of the 1950s led to constitutional reforms that favored organized labor.75
The student protest movement would also lead to limited reforms, but not before
government troops brought the tension over political reform to a tragic climax on
October 2,1968 at a plaza in Mexico City called Tlatelolco Square.
The student protest movement was gathering momentum in the mid-1960s, as
university students organized into brigades and held street rallies attended by
thousands of demonstrators, supporters and onlookers. As with the student movement
in the United States, the movement in Mexico developed a counter-culture identity,
with different modes of dress and language. Students took over the administration of
universities, dropped their classes, and took to the streets. They adopted Che
Gueven-a as their symbolic leader, and spoke of politics in slang terms lightning
meetings, the Movement, fish (Communist Party members) and mummies

(Party members and bureaucrats). 76 The students demanded the release of political
prisoners such as jailed union leaders Demetro Vallejo and Valentin Campa.
The student movement in Mexico was large and well organized. Student
brigades printed hundreds of thousands of pamphlets and posters, organized large
street demonstrations, and funded their activities from public donations. The
Movement organized several large but peaceful demonstrations in Mexico City in
August and September of 1968 that involved tens of thousands of marchers and
onlookers. On August 27th, the students gathered a crowd of about 300,000 people in
the center of Mexico City, carrying banners that read The Army should defend the
people (alpueblo) and not attack it, and Liberty to the political prisoners. 77 When
the government criticized the demonstrators as rioters, the students responded with a
remarkably well organized and disciplined night march called the Silent
Demonstration. Thousands of protesters marched through the streets, wordless, with
tape over their mouths, carrying lighted candles. It must have been an eerie sight for
the residents of Mexico City to look out of their windows to see a candlelight vigil in
the streets, and hear nothing but the sound of thousands of footsteps on pavement.
Celebrated Mexican author Elena Poniatowska wrote a book on the student
movement that focused on the events of October 2, 1968, when Mexican army troops
fired on thousands of members of the Movement and onlookers in Tlatelolco Square.
Poniatowska interviewed people who were present that night, and they recounted the
events that led up to the tragedy, remembered as the night of Tlatelolco. At about
5:30 in the evening the square was filled with some 10,000 students, and the men,
women and children who had come to watch the demonstration and hear the
speeches. According to later newspaper accounts, the crowd was surrounded by 5,000
Mexican troops with armored cars and tanks. There were also plainclothes security
agents on the rooftops and upper floors of the buildings looking down over the plaza.
While one of the speakers was addressing the crowd, flares appeared in the sky
overhead, and rifle fire came from all directions.78 People panicked and fled from

the plaza, only to be confronted on all sides by Mexican troops. One journalist
speculated that the army units must have taken fire from each other, as they had
surrounded the square and rifle and machinegun fire was coming from units facing
each other on the ground as well as from the buildings above.
The people interviewed for Poniatowskas book said that the troops fired on
the crowd for nearly half an hour. An official count of the dead was never released
(and probably never compiled), but journalists who reported the story estimated that
325 people were killed that night. It is impossible to get an accurate count of the
wounded, as the crowd dispersed in panic into the surrounding area, but journalists
estimate that thousands were injured.79 The actions of the soldiers, told through
interviews with survivors and photos of the dead and wounded, paint a picture of
unnecessary tragedy at the hands of a government frustrated by its inability to deal
with popular protest.
The protest movement was cut short by the violence in 1968, but it would
leave a lasting impression of the abuse of government power on a generation of
Mexicans. It would also highlight the changes in Mexican society since the 1930s,
and the revolutionary models inability to incorporate those changes. The regimes
resort to violence against its own citizens revealed a widening disjunction between
revolutionary theory and reality. Author Octavio Paz commented on this in his
introduction to Poniatowskas book:
It was not that our government officials were blind and deaf; it was simply
that they refused to see or to listen. In their eyes, acknowledging the mere
existence of the Student Movement would have been tantamount to self-
betrayal. The Mexican political system is founded on a single, immutable
belief: the President of the Mexican Republic and the official Party are the
incarnation of the whole of Mexico.
Octavio Pazs comment suggests that the governments revolutionary mandate
was based on an absurd premise. Perhaps after two generations Mexicans were less
affected by the symbolism of the Revolution, and more concerned with personal

issues. After 1968, these personal concerns would be linked with the wider issue of
political reform, and the reform impulse expressed through existing and legal -
political channels. Susan Purcell noted in her 1977 essay on the future of the Mexican
system that groups that until now have been relatively susceptible to symbolic
manipulation will begin to make more active demands upon the political system. 81
She was describing a process that had already begun during the 1960s, and would
continue through the end of the century. As Mexico became more urban and complex,
societys interests diverged, and accommodation within the revolutionary family
became more difficult. The attempt to create policy by consensus had never been
possible without the strong hand of the president to impose discipline, and the
political dissent of the 1960s and 1970s suggests that many Mexicans no longer
perceived that the Party as a coalition of the whole.
Alfredo Rodriguez, a professor at the Technological Institute of Advanced
Studies of the West (ITESO), was interviewed for this paper. He believes that the
protest movement of the 1960s initiated the process of political opening in Mexico.
His comments support Susan Purcells observation that in the 1960s Mexican citizens
began to demand more from the political system, and these demands took two forms.
The demands of the union sector were primarily centered around issues of pay and
workers rights to elect their union leadership. This was a movement for democracy
in the limited sense that workers wanted more freedom to organize independently of
the official unions that were affiliated with the PRI. The demands of the students, by
contrast, were wider in scope, and not limited to issues that affected the universities.
While the union demands had an economic character, the wider protest movement
was directed against the authoritarianism of the Diaz Ordaz presidency and the PRI. It
was a movement against both economic injustice and the Partys domination of the
political process. In a wider sense, it was a movement against the mechanisms of
control the PRI had used for decades to maintain a governing consensus, and to
exclude unofficial groups from participating in the political process.82 The protest

movement of the 1960s was important in that it initiated a violent response from the
government in 1968, and then a conciliatory process of opening the political system.
That process would continue, with sporadic political reforms, through the end of the
The middle class pressure for political inclusion was reflected in a working
class movement toward union independence. Independent unions such as the
Sindicato Mexican de Electricistas (SME), the Federacion Nacional de Trabajadores
de la Industriay Communicaciones Electricas (FNTICE) represented workers of
recently nationalized private companies. They were less accustomed to the
intervention of the state in union affairs, and were militant in defense of their
independence and of their own interests. The FNTICE fought against incorporation
into the National Union, joining with other unions in an alternative group called the
Democratic Tendency.83 The Democratic Tendency called a strike of its members in
1975, which was countered by the parastatal companies firing the strikers. The
workers demonstrated in 1977, which provoked a confrontation with riot police. By
1978, the movement had disappeared.
In 1974 and 1975 the expansion of the state sector reinforced charrismo at the
same time that workers were forming new, independent unions and striking again for
higher wages. The Sindicato de Telefonistas de la Republica Mexicana defeated a
charro candidate for the unions presidency, and then proceeded to renounce the
unions membership in the PRI. Author Judith Teichman states that, Government
officials then began to apply various forms of pressure to ensure that the union did
not leave the Congress of Labor (Congreso de Trabajo, or CT).84 This caused the
new union leader, Hernandez Juarez, to reverse his position and persuade the
membership to continue their struggle while remaining in the official union. Applying
pressure from within the system assured that they would receive the protection of the
government, and avoided the threat of direct government intrusion into the union or
of Juarezs removal.

The regimes traditional pattern of conciliation following repression of dissent
continued in the aftermath of the demonstrations and shootings of 1968. The student
demonstrations led to larger education budgets and influenced President Diaz Ordazs
choice of a successor. He appointed Luis Echeverria as the president-elect, in part
because Echeverria was a candidate who would be acceptable to radicalized elements
of Mexican society. Both the left and elements of the middle classes registered their
dissatisfaction with the government by joining non-governmental organizations and
supporting existing adversaries of the PRI, such as the conservative PAN and a
number of smaller left-wing parties. Echeverria would attempt to restore a sense of
national unity through increased pubic spending and an unprecedented expansion of
the public sector.
The government did respond to the political activism of the 1960s with some
political reforms. In 1973 the regime made it easier for opposition parties to gain
official registration and win seats in the Chamber of Deputies. In 1972 the threshold
for qualifying for proportional seats in the Chamber was reduced from 2.5 percent
to 1.5 percent of the popular vote.85 This increased the opportunity for opposition
parties to elect deputies, and encouraged new parties to form. Other electoral reforms
would follow with each successive administration through the end of the century,
each one begrudgingly allowing more opposition seats in the Chamber. Until the late
1990s, however, these reforms were never allowed to go so far as to undermine the
hegemony, or at least the dominance, of the PRI in the legislature. The PRI remained
the dominant party, and the Mexican president remained in control of the PRI, with
the ability to remove the Party head at his discretion.
The business community became particularly dissatisfied with economic
policymaking under Echeverria and his successor, Jose Lopez Portillo. Business
leaders saw the expansion of the public sector as the product of the alliance between
labor, bureaucrats and special interests. Small business people and many white-collar
professionals felt excluded, and their economic interests threatened as inflation rose

and hovered near 20 percent through most of the decade of the 1970s. As Ruth
Collier notes, pressure for the inclusion of middle class interests became a reform
issue within the PRI itself. The influence of middle class constituents was forcing
many within the Party to re-examine their traditional reliance on the rural and labor
sectors. PRI modernizers envisioned a shift in alliances toward the growing urban
middle classes.87 By the 1970s Mexicos demographic changes were apparent in the
changing character of the constituencies that were politically relevant to the regime.
The Mexican middle classes were emerging as not only an important interest group,
but as an important base of support for democratization.
Despite the fact that the PRI allowed an increasing opposition voice in the
Congress, opposition parties had a weak institutional base from which to organize
campaigns. By contrast, the PRI was both well organized and well funded, with a
national cadre of governors and officials who supported it. Consequently, efforts to
democratize the political process were more formal than substantial, and though
political reform was a feature of each administration, it did little to challenge the
regimes hegemony. When conflict within the official sectors arose, the government
preferred to solve its political problems through economic means usually through
wage increases or distribution of subsidies. In spite of the fact that the opening of the
political process in the 1970s was more formal than substantial, it represented an
important digression from the inclusionary-authoritarian model. It was an implicit
admission that the model could no longer accommodate a society that had grown
more complex than Mexico of the 1930s. By dropping the legal barriers to
registration of minority and opposition parties, the PRI opened the possibility for
candidates to compete openly for seats in the Mexican Chamber of Deputies. The
election reform of 1977 not only allowed minority parties to achieve legal status, but
allowed them to use government funds to finance their activities. Even the
Communist Party was allowed to register and achieve legal status.

The Expansion of the State
Luis Echeverria took office in 1970 just two years after the shootings in
Tlatelolco Square and popular dissatisfaction with the government's authoritarian
system was creating pressure to either democratize the political process or step up
efforts at co-optation through government spending. Echeverria chose the latter. He
resorted to expansion of the public sector to increase employment and stimulate the
economy. The economy was still growing in 1970, but Echeverria was looking for
additional sources of employment and wealth as tools for reducing political conflict.
President Echeverria introduced more emphasis on social spending into the economic
development plan during his term (1970 1976). He called the increase in the state
sector and in social spending shared development instead of stabilizing
development, which hinted at the abandonment of fiscal and monetary restraint in
the old model.89 The private sector countered Echeverrias plan with a refusal to
accept higher taxes, and the result was a widening government deficit. This led not
only to a growing fiscal deficit, but to a corresponding rise in foreign debt and
inflation in the mid-1970s.
According to a study by Luis Rubio and Roberto Blum published in the Latin
American Research review in 1990, the increase in the size of the public sector from
1970 to 1982 was unprecedented. Public spending increased to 50 percent of GNP
and foreign debt ballooned from 4.5 billion dollars to over 100 billion dollars.90
Between the administrations of Luis Echeverria and Lopez Portillo the number of
public-owned enterprises increased from just over 100 to over 1000 91 The number of
enterprises with some degree of state investment or ownership increased by nearly a
factor of ten from 1970 to the end of Miguel de la Madrids administration in 1988,
rising from 180 enterprises to 1,155. During the same time period, the number of
public employees rose from about 500,000 to 2.2 million.92
Echeverria increased the number of firms with some government ownership
from 84 in 1970 to 845 by 1976, and doubled the number of government employees

to over one million during his term alone.93 Although public sector debt rose in both
absolute terms and as a percentage of national output, Echeverria had made a
conscious decision to sacrifice economic growth for distribution, if necessary, in the
hope that the latter would provide stability and legitimacy to the regime. Public
spending grew from 20 percent of GNP in 1970 to 50 percent in 1986, but there was
no corresponding increase in the level of productive investment. In fact, in 1976, the
last year of the Echeverria administration, capital formation fell by 3.5 percent.94 The
increase in spending without an offsetting increase in productivity was inflationary.
Inflation rose to about 22 percent per year in the last three years of President
Echeverrias term, making Mexican goods more expensive for the Mexican consumer
and less competitive internationally.95 The balance of payments deficit tripled in the
same period an ironic consequence of an economic policy that was originally
designed to make Mexico more self sufficient, not more dependent on imports.96
Echeverria pursued an activist role for the state in the economy, expanding the
public sector and pouring public funds into schools, housing, and development
programs. As public spending increased and the public sector took on more
responsibilities, production of oil, electricity steel and other outputs of state or
parastatal industries also increased. The Mexican GDP grew at an annual rate of 5.6
percent during his term.97 Echeverria had no incentive to cut back on government
spending or reduce borrowing and risk a recession while the economy was still
growing. His economic policies were a reaction to political demands and an
understandable aversion to political instability. Unfortunately, the avoidance of short-
term instability allowed the continuation of economic policies that aggravated
Mexicos debt problems and created long-term instability for Echeverrias successors.
Those policies set the stage for the economic failure that would occur six years after
he left office.
With the peso fixed at an artificially high price, Mexicos domestic
manufactures became expensive and uncompetitive abroad. Prices for domestic goods

crept above the average world prices for the same products, and created market
pressures that were directly contrary to the government's objectives. Protection of
domestic industry and over-capitalization of the public sector began to produce
tangible effects on the economy during the 1970s. Inflation and high domestic prices
spurred demand for foreign machinery and consumer goods, especially luxury goods.
Imports of foreign merchandise increased from about $445 million in U.S. dollars in
1965 to $3,637 billion by 1975, taking Mexico's net liquidity balance from a positive
figure in the late 1960s to a negative $921 million in 1975.98
During the Jose Lopez Portillo administration expansion of the state sector
and growth in spending accelerated and the debt burden worsened. Statistics from the
Mexican Ministry of Planning and Budgeting (SPP) show that federal expenses
gapped away from revenues beginning in about 1978. Despite increased increasing oil
revenues, government expenses outran income by approximately $2.9 billion in 1979,
by another $3.25 billion in 1980, and another $8 billion in 1981. The government
increased its borrowing to finance the deficit, doubling the public debt to $52 billion
and increasing the money supply by about 36 percent per year from 1978 to 198199
In an attempt to make exports competitive, Lopez Portillo devalued the peso
in January 1982, just before leaving office. By February the peso had fallen from 26
to the dollar to 44 to the dollar a decrease in value of over 40 percent. This
devaluation put the peso at parity with the dollar, measured by purchasing power, and
could have restored Mexicos manufacturing exports if not for domestic political
pressures to raise wages. To be successful however, a devaluation must be
accompanied by complimentary fiscal and monetary policies, but such restrictive
policies were unacceptable to important sectors of the Party. Subsidies to businesses
continued and public sector wages were increased by about 30 percent across the
board. Not only did the devaluation fail to gain any export advantage, but its
byproduct was to raise the inflation rate from 30 percent per year to over 70 percent
in 1982.100

Considering the power of the Mexican president in a presidential system,
one wonders why Echeverria and Lopez Portillo did not take a more forceful stand
against inflationary policies. As mentioned, part of the reason has to do with
increasing popular unrest through their presidential terms. Part of the reason is that
Mexicos history with debt and growth led them to believe that the economy would
grow out of the problem before it became a crisis. Antonio Ortiz Mena, the secretary
of the Treasury under Echeverria had been Secretary of the Treasury under Adolfo
Lopez Mateos (1958 1964) and Gustavo Diaz Ordaz (1964 1970).101 His
experience with state-led development led him to believe that borrowing would
produce the internal growth needed to pay back foreign loans. He maintained that
foreign borrowing posed no long-term threat because the internal investments they
would make possible would yield a high rate of return. This was a reasonable
assumption had Mexicos import substitution model been able to maintain the rates of
growth and low inflation sustained during the years of stabilizing development.
However, that would have required that the state managers match government
expenses (including borrowing costs) with productivity goals an element of
discipline that was missing from the state-directed model during the 1970s.
Mexicos political stability had been tied to economic growth for decades, and
the financial crisis challenged that stability. Consequently, Mexico's economic model
became increasingly reactive to political events, and the process of economic
planning was politicized to the extent that economic policy became irrational.
Rational economic policy avoids extremes that produce ironic consequences those
which impoverish the people they were designed to protect. The ironic consequence
of currency devaluation, public spending, and foreign borrowing was an increase in
domestic prices and further disincentives for production. Inflation rose from about 18
percent in 1978 to over 40 percent in 1981. Real wages in Mexico fell steadily from
1976, a year of economic expansion, through 1980, when the economy began to
stagnate. Despite economic growth of about 8 percent per year, inflation eroded the

wages of working class people by about 12 percent in this three-year period. When
the economic crisis hit in 1982, real wages fell faster losing another 35 percent of
their real value by 1985. Authors Levy and Szekely said the impact of inflation on
wages by 1985, meant that wages were back at their level of two decades earlier. 102
Mexico's economic policy of development through expansion of the state
became self-defeating as resources were spent to subsidize the parastatal sector, or to
directly subsidize income and consumption. This was precisely what Ortiz Mena had
proposed he would not do with borrowed funds, but economic planning was
overcome by political pressures. Those political pressures contributed to a cabinet
reorganization under President Lopez Portillo. Lopez Portillo hoped to resolve the
developing financial crisis through administrative means, and came into office in
1976 promising to bring state spending under control. The governments budget had
ballooned from 120 billion pesos in 1970 to 635 billion in 1978, creating controversy
within the Party over the states economic program.103
In a move to quiet the discord between traditionalists and reformers within his
own government, Lopez Portillo decided to separate responsibility for government
expenditure and raising revenue. He gave the director of Secretaria de Programacion
y Presupuesto or planning and budget (SPP) responsibility for deciding the size and
direction of government expenditures, and left the job of finding the needed revenue
to the finance ministry. This was part of a cabinet reorganization that left super-
ministries in charge of large sections of the Mexican economy. The reorganization
was coherent with the change in the states approach to economic planning and
directing public investment. The idea was to substitute macroeconomic planning for
the accounting methodology of the ministry of finance, which used to total spending
requests, and compare them with the funds available from lenders. The ministry
would give the green light to those projects for which foreign finance was available,
and then make a judgement about how much of the rest could be financed
domestically. As the state moved to broader macroeconomic economic planning,

domestic political pressures maintained the bias toward growth in state spending and
Rather than bring unity, the separation of responsibility for spending and
revenue aggravated the disunity among the responsible agencies. This reshuffling did
not solve the problem of accountability for public expenditure, and actually made it
worse by separating the responsibility for spending and raising revenue among
different departments. The unintended effect was to actually further institutionalize
the growth of government and make it more unlikely that the new president would
deliver on his campaign promise to reduce spending. The newly empowered ministry
of planning and budget drew up national and regional plans for government
investment projects and expenditures, while the finance ministry took the role of
spoiler and opposition voice to the SPPs plans. A battle between SPP and finance
erupted over the 1977-1978 budget, with finance forecasting government revenues at
80 billion pesos less than that forecast by planning and budget. The split in
responsibilities resulted in a split between the minister of planning and budget, Carlos
Tello, and of finance, Julio Rodolfo Moctezuma, and created a rift in the
administration. The President finally had to solve the problem by asking for Tellos
resignation, and then for Moctezuma's in turn, in order to keep the peace between the
two ministries. (It was after these firings that Lopez Portillo made his remark to the
press that he did not have to publicly account for his actions, since Mexicos system
was not a parliamentary, but a presidential system.)105
As the state expanded and state spending and borrowing increased, the
business community began to press for limits on the states expansion and intrusion
into the economy. In 1973 Mexicos labor leaders came together to demand wage
hikes, price controls and a shortened work week through the official labor sector, the
Congreso de Trabajo (CT). Business resisted, and labor threatened a general strike in
support of a 33 percent wage increase. President Echeverria sided with labor, and
called for a popular alliance to resist pressures by the business community to back

away from his expansionist policies. The government raised wages by 20 percent,
averting a strike but antagonizing the business community.106 Echeverrias
consolations to the labor sector exemplify his unwillingness to push unpopular
economic reforms at a time when regime stability was uncertain.
According to Mexican author and policy analyst Luis Rubio, Echeverria
recognized the problem of growing deficits early in his administration, although he
was in a sense trapped as the beneficiaries of government patronage blocked early
attempts at reform. The president proposed to regularize the tax system and raise
more revenue through income taxes, and in this effort he was blocked by the business
community. His Minister of Finance tried to end tax evasion and the anonymity of
stockholders, but the business community blocked these efforts as well. Echeverria
recognized that Mexican industry needed to become more competitive and
productive, yet he was under tremendous pressure to continue existing protectionist
policies. It seems that he tried to take a middle road by encouraging growth behind
the existing protective barriers. He faced a similar quandary in the need to extract
more tax revenue from the business community and the wealthy. He needed the
support of private capital to continue Mexicos economic development agenda, yet
could not fulfill the states responsibilities under the existing tax structure. Opposition
to tax increases contributed to the scarcity of revenue precisely when in was most
needed to finance the expansion of public services. To finance this public expansion,
the government fell back on oil revenue and foreign loans.107
At this point the Mexican government had an opportunity to use the revenue
from foreign loans and oil exports as a cushion against cutbacks in government
spending. The failure to use these limited resources to finance such a transition
represented a lost opportunity to avert an economic crisis. The failure of economic
reform to materialize, and the reliance on deficit spending as an alternative, speaks to
the difficulty of reversing patronage relationships once they are established.
Echeverria found himself caught between labor and business groups each

demanding concessions at the expense of the other. Between the two groups, the
government had more control over labor, and despite his populist image, Echevema
attempted early in his administration to weaken the charro leadership of the labor
unions. He tried to unseat labor strongman Fidel Velazquez, who had held the head of
the CTM union since 1941, but the CTM responded with mass demonstrations and
threats of a general strike. Velazquez energized the union by publicly demanding
wage increases, a forty-hour week, and national unemployment insurance, among
other measures. By mid-term, Echevema had backed away from his efforts to reform
the labor sector. The avenue of least resistance was to curry popular support with
continued borrowing and distribution. This was a result of both the political culture of
Mexico and the structure of the political system itself. Consequently, the bias toward
co-optation in lieu of reform would outlast the Echevema administration.
Mexicos economic crisis made it more difficult for labor leaders to negotiate
wage and benefit increases from the government. During the late 1970s, when the
Lopez Portillo administration was under pressure from the IMF over terms for new
lending, charro leadership of the Confederation de Trabajadores Mexicanos (CTM)
cooperated with the government to discourage union demands for wage hikes. The
veteran labor leader Fidel Velazquez agreed to relinquish control over a workers
housing fund, which was a lucrative perk to the labor leadership, and to turn the fund
directly over to the union members. In return, the president would discourage the
formation of independent unions, which had been forming in the wake of persistent
inflation and erosion of wages. Velaszuez further agreed to limit the CTMs wage
demands to 10 percent in 1977 a year in which inflation was between 20 and 25
percent.109 Ironically, the attempts by presidents Echevema and Lopez Portillo to
satisfy certain groups within the system alienated others, and left the country and the
party divided. The popularity of the two presidents among the working classes was
offset by their unpopularity among the upper and middle classes.

The Oil Boom

Between 1976 and the end of the Lopez Portillo administration in 1981,
JEMEX tripled its oil output to 2.7 million barrels a day. In 1982, Mexico agreed to
triple its sales of oil to the U.S., in part to build a stockpile in the strategic petroleum
reserve. That year Mexico was both the worlds fourth largest oil producing country
and the fourth largest exporter of crude.110 Oil provided a period of time during which
economic reform could have begun with minimum impact to the poor and the popular
sectors. As I mentioned, political pressures and institutional disincentives for reform
would mean that significant reform would require a crisis. Mexico needed new
j sources of revenue, and oil exports represented the opportunity to forestall such a J
i crisis. Oil exports did help to re-establish economic growth from 1978 to 1981 before
^Mexico fell back into recession in 1982. The oil export strategy failed when the world
oil market became saturated. Even if PEMEX had pumped an extra million barrels of
I oil a day in 1982, it would not have been able to sell that oil in world markets without
^affecting prices. In other words, Mexico could have boosted oil exports, but would
^iot have generated more revenue.111
As it turned out, the time that oil supported the economy was short about
three years from 1978 through 1981 when the world price began to fall. By 1983 it
had fallen 20 percent, and Mexican industry was still not internationally competitive.
' The collapse of the oil market was disastrous for a country dependent on a single
/^commodity export. The initial fall in oil prices triggered the debt crisis ofJ982^and
(jiggered a second financial crisis when the price plummeted again inl985. When
jcrude prices dropped in 1985 and PEMEX dropped its price for Isthmus crude, the
government lost about $330 million in foreign exchange. The shortage of resources
affected Mexicos negotiations with its foreign creditors, and prolonged the debt
crisis. Mexicos deficit rose to 10 percent of GDP in 1985, and the IMF and private
banks suspended further credit. Mexico would retaliate by postponing payments on

$950 million due in the fall of 1985, and announced that they would not pay another
$250 million due the following year.112
^After 1985 oil exports clearly would not be the financial salvation for the
Mexican economy (See chart, Cash Crude Oil, page 76). Revenue from oil exports
was about $6 billion in 1986 less than half of what it had been the prior year.113 The
strategy of using oil as a single source of revenue to finance the expansionist state
failed partly because of internal inefficiencies and partly because of the fall of world
il prices. Judith Teichman summarizes the effects that Mexicos particular form of

statism had produced by the late 1970s, and how oil revenue allowed the problem to
grow to a crisis situation:
During the petroleum boom years (1976 1981), high economic growth rates
and abundant foreign exchange earnings had made it possible to paper over
the basic structural deficiencies of the Mexican economy: a chronic balance of
payments deficit in the current account, an uncompetitive manufacturing
sector, a decline in agricultural production and exports, and a burgeoning
public sector deficit. Hence, officials critical of the governments
interventionist free spending policies could be largely ignored.114
The Debt Crisis
The economic situation of the late 1970s brought pressure from Mexicos
lenders and the International Monetary Fund. As early as the mid-1970s reformers
within the PRI itself were adding weight to the IMFs insistence that Mexico reduce
government spending and rationalize the economic goals of its public sector. In 1977,
the IMFs conditions for further loans to Mexico were that public sector deficits be
reduced from 8.7 percent of GDP at the end of 1976 to 2.2 percent by 1979. New
foreign debt was limited and Mexico and the IMF agreed to targets for growth in the
^.rnoney supply. The conditions for 1977 were met, partly through negotiation and
compromise with labor on wages, and partly through a turnaround in the balance of
trade made possible by increased oil exports and higher crude prices. Still, Mexicos

^real growth in 1976 fell to 2 percent, the lowest in decades.115 This was an important
consideration for social policy as well as for growth, as the burden imposed by
supporting uncompetitive state enterprises reduced the societys ability to carry out
other activities.
In the early 1970s there was a dramatic increase in private lending to
developing countries, especially by US banks to countries in Latin America. Of that
lending, the lion's share went to three Latin American nations Mexico, Brazil and
Argentina. As Chairman of the Federal Reserve, Paul Volcker, noted in a letter to
Congress in May, 1983, international lending was "a fairly recent development for
US banks," and loans to foreign governments was "largely a phenomenon of the last
ten years."116 Consequently, the banking community did not have a set of lending
criteria, developed from experience, to use to evaluate the creditworthiness of these
loans^There was a feeling that loans to sovereign governments were safe, as
^governments do not declare bankruptcy or disappear. They do not go out of business,
but rather make adjustments in their fiscal and monetary policies in response to
\ financial problems.
The inexperience of the US financial community in lending to foreign
countries does not excuse the excesses of the 1970s, however, as loans were made to
Latin governments with little of the lending discipline that banks apply to domestic
borrowers. As the chairman of the House Committee on Banking, Finance and Urban
Affairs said in his opening statements during the 1983 hearings on the debt crisis,
"U.S. banks have ignored prudent practices and domestic needs in search of the quick
buck and the sky-high interest rates offered by desperate borrowers caught in an
international financial squeeze." 117 Consequently, the banking community
overexposed itself to countries in Latin America, particularly Mexico, Brazil and
Argentina, just before the double-digit interest rates of the late 1970s stalled the
^American economy and led to an international recession. The "oil crisis" of the mid-
veighties contributed to this problem in two ways. First it raised the cost of oil to

/ importing, industrialized countries, and second, it allowed developing oil-exporting
countries such as Mexico to increase their foreign debt to levels that would not be
serviceable once crude oil prices settled back toward their historical levels. When
prices did settle, these countries found themselves renegotiating loan terms with their
lenders. ^
/' Mexicos debt crisis may be dated from August 22, 1982, which was the day it
defaulted on its public debt by asking for an extension on its debt payments. Mexicos
foreign debt had soared to over $100 billion the highest in the world both in per
capita terms and as a portion of Gross National Product.118 A combination of
expansive fiscal policy, a drop in world oil prices and a rise in international interest
rates pushed the overextended Mexican economy to the point of default. In August
1982 private lenders were refusing to advance more loans to the Mexican
government, and Mexico started talks with the U S. Treasury to arrange for
emergency financing. That same month, Mexican officials met in New York with
their major private banks that agreed to defer $8.1 billion in principle payments on
their loans. With IMF assistance, Mexico got these same lenders to commit another
$5 billion, and to reschedule a further $23 billion of debt.119
The IMF and Domestic Policy
President Lopez Portillo (1976 1982) ended his sexenio with the Mexican
economy in the most perilous state since the 1950s. Mexico was deeply in debt to
international banks, many of them U.S. banks, and was negotiating with the IMF and
World Bank for more lenient payment terms. The World Bank and the IMF insisted
on structural adjustments to Mexicos economic model, specifically to address the
inefficient use of public enterprises as vehicles for fulfilling social needs and
patronage obligations. They recommended the alternative course of limiting the
public arena, and focusing government spending on public needs such as education,

utilities, transportation, and poverty programs. This would require some political
changes, as not only would traditional popular sectors be deprived of government
revenue, but the wealthy would have to bear a greater share of the tax burden.
As the economic crisis worsened in the 1980s, it compromised Mexicos
ability to perform on its agreements with the IMF, and actually forced Mexico to
harden its bargaining position. This introduces the role of the International Monetary
Fund and Mexicos foreign lenders in shaping Mexican economic policy. The role of
the IMF and U.S. banks in Mexico was controversial, as it is today, because they
emphasized austerity measures to balance government spending with revenues. The
IMF and U.S. banks were in an ongoing process of negotiation with Mexico from the
late 1970s through most of the 1980s over debt issues, but their influence over
Mexican policymakers was probably less important than internal factors. The fact that
the U.S. did have influence over Mexicos presidents, and hence over policy, affirms
the role of external actors in Mexican domestic policy. At the same time, the limits on
the ability of foreign actors to affect Mexican policy reveals the degree of resistance
Mexico had to that influence. Lopez Portillo admitted in an interview with Jorge
Castaneda that he could never acknowledge the U.S. influence publicly. Protecting
the sanctity of Mexican sovereignty was a primary political consideration, even under
circumstance where that sovereignty had already been compromised by economic
dependence. Lopez Portillos comments on choosing a successor under these
conditions reveal that a candidates acceptability to the U.S. was an unacknowledged
consideration. He said:
I allowed myself no conversation with the North Americans about any aspect
of Mexicos internal affairs. 1 wouldnt have dared. It would have shamed me.
If you had understood, with all the nuances of the case, that the Americans
thought poorly of someone, what would have happened?
Well, naturally I would have looked for another candidate who satisfied an
indispensable requirement for a Mexican politician at the level we were
dealing with in this case, which was that he absolutely had to enjoy the favor

of the United States... Obviously, the United States is more important and has
r I Ofi
to be considered. But I certainly didnt ask them. How embarrassing!
The Mexican presidents remark says more about the need to appear
independent in the public eye than it says about the influence of the U.S. on Mexican
policy. Although it is unlikely that the U.S. Congress carried much weight with the
Mexican government, the fact that the U.S. has a strong economic presence in Mexico
has weighed on presidential policy for decades. The influence has often been subtle,
and almost always unacknowledged, as Mexican nationalism and independence have
been very powerful themes in public life and national policy. On the other hand,
foreign lenders were in a situation where they could not demand more of Mexico than
was politically or economically possible to get from the government. US banks had
not believed that a foreign country would go into default. When it happened, they
learned that dealing with a sovereign country poses special problems in collection,
and requires the lender to accommodate the countrys schedule for debt repayment to
some extent. Bank regulators, the Fed and Treasury are all in the position of having to
encourage U.S. banks often the small and medium-sized banks to actually
increase their exposure to countries already deeply in debt, to give those countries
some breathing space in which to bring their accounts into balance.
When oil prices fell to about eight dollars a barrel in 1986, it created a new
financial crisis, and an accompanying rift within Miguel de la Madrids cabinet.
Salinas de Gortari was the presidents head of Planning and Budget (SPP), and as
such, had the responsibility of dealing with the International Monetary Fund and
Mexicos U.S. creditors. The fall in oil prices made it impossible for Mexico to meet
its internal budget and simultaneously service its foreign debt. Due to both his
position and his personal influence with the President, Salinas was in control of the de
la Madrid governments fiscal policy. Despite his belief in orthodox economic
policies, he pushed the idea that Mexicos crisis was caused by a scarcity of funds,
rather than excessive spending. He was able to sell the idea to the U.S. and the IMF,

in spite of more austere program put forward by finance minister Silva Herzog.
Herzog resigned in the summer of 1986 over the policy disagreements between
himself and Salinas, and Salinas went on to achieve a victory for his position. He
uttered a phrase that author Jorge Castaneda calls famous when he said, We have
cut spending right down to the bone. We cant cut any more. 121 That year the IMF,
the World Bank and the U.S. government approved a $9 billion debt-relief package
for Mexico that required neither spending cuts nor tax increases as a condition.122
In light of this pressure, Mexico actually acted boldly in the face of IMF and
U.S. banks. The country needed loans to cushion the impact of Miguel de la Madrids
austerity program, and avoid serious political instability. As Minister of Programming
and Budget under President Miguel de la Madrid, Salinas developed the position that
Mexico could not cut spending as drastically as the IMF requested. He pushed the
concept of an operational deficit as a domestic necessity and something separate
from the total financial deficit. This became part of Mexicos argument for leniency
in its negotiations with the IMF. The Mexican negotiators were able to demonstrate
that Mexico was correcting the institutional causes of government deficits through
privatization of inefficient public enterprises, and argued that the country had to grow
its economy in order to continue to service its foreign debt. According to former
president Miguel de la Madrid, who presided over the early years of the debt crisis,
the Americans were receptive to the idea of continuing an operational deficit while
market reforms allowed the country to grow its way out of indebtedness.
Mexican president Miguel de la Madrid was aware that he had a strong
bargaining position in the implied threat of non-payment. In an interview with Jorge
Castaneda, he said:
I think the IMF and the U.S. Treasury recognized the need to yield in their
positions. When the problem of a new oil-price crisis appeared in January and
February 1986,1 gave a strong speech here in Mexico city, saying that it was
more than we could stand, that we had to react, and reiterating the thesis that,
in order to be able to pay (its debt), Mexico had to grow. I hardened my
position, taking advantage of my new minister of finance, and Gustavo

Petriccioli was able to go before the IMF and negotiate with much greater
Despite the Mexican governments bargaining power, U.S. officials and the
IMF would continue to exert pressure for orthodox reforms on the de la Madrid
regime. In 1986 U.S. Treasury Secretary James Baker proposed that Mexico formally
undertake structural economic reforms as part of its responsibilities to the lending
community and the U.S. government. He proposed that the IMF play a greater role in
Mexicos monetary policies, and that in return commercial banks support Mexico
during the transition period with more loans. This three-part policy program was
severely tested the following year when oil prices plunged another 50 percent, which
cost the Mexican government an amount equal to 20 percent of all its public
With the insistence of the IMF, commercial banks provided another $6 billion
in loans, but then stopped participating, despite pressure from the Treasury. They had
survived the debt crisis and avoided bankruptcy, and were now looking for ways to
get Latin American debt off their books. They were not willing to continue to
increase their exposure when it had become obvious that the debt crisis was not
temporary, and would take years to work itself out. In 1987 Citibank marked down
the value of its international debt by 25 percent, and other banks began selling their
debt in the secondary market at large discounts.125
The debt crisis finally resolved itself through market mechanisms. The U.S.
and Mexican governments worked out an arrangement where private banks could
exchange their Mexican loans for new 20-year Mexican bonds, secured by the U.S.
Treasury. The U.S. backing made the bonds marketable, and the firm of J.P. Morgan
became the underwriter for a debt-for-debt swap in which $3.6 billion of old debt was
ciincelled and exchanged for $2.5 billion in new bonds. Lenders were able to cash out
of their positions by selling the new bonds, and the Mexican government reduced its
debt by over $1 billion through the deal. The U.S. Treasury followed this with a

second debt swap called The Brady Plan, wherein the U.S., Japan, the Mexican
government and international agencies such as the World Bank and the Export-Import
Bank put up collateral for new bonds that private lenders could purchase with old
debt. There were several options for how this could be done, but all involved
substantial loss of principal by the private banks. A direct swap of Mexican debt
could be made for new 30-year bonds whose principle value was 35 percent less than
the value of the old debt. The Brady Plan helped reduce Mexicos total foreign debt
from 76 percent of GDP in 1986 to 33 percent by 1994.126
After decades of economic growth and low inflation, Mexico began to
experience the exhaustion of the protectionist model in the 1970s. The inefficiencies
of the public sector that had been allowed to continue under state protection now
threatened the viability of the economy. Mexico needed fresh sources of capital to
continue to grow its economy, but also needed structural reform of the tax system and
the system of state protection and subsidies. Presidents Echeverria and Lopez Portillo
recognized that both growth and reform were twin priorities, but lacked the political
support to carry out meaningful reform. The consequence was a continued over-
dependence on oil and foreign debt that actually worked against reform efforts by
prolonging the necessary reckoning with the economys internal inefficiencies. By the
end of the Lopez Portillo presidency inflation and debt would produce conditions for
an economic crisis, and provoke an exodus of private capital out of the country. The
consequence of avoiding hard choices during the 1970s was financial collapse and a
political crisis that unfolded in the early 1980s.

Cash Crude Oil
Source: Salomon Smith Barney (Portland, Oregon, printed March 17,2002) Courtesy or Ron Senn.

By the late 1970s business and middle-class elements of the private sector
began to mobilize in opposition to the state for both ideological and pragmatic
reasons. Private businesses were being forced to compete with state enterprises that
did not have to show a profit. Subsidized industries could offer better salaries and
lower prices if they received subsidized inputs or financing. Private business was also
concerned by the states crowding out private access to capital, as the public deficit
absorbed the available funds of the banking system set at 90 percent of bank
reserves. Not only did this restrict the amount of credit available to domestic
private business, but it also made it artificially expensive. These credit costs were
passed on to consumers, who paid a tax for state crowding out of private
investment in the form of high prices. Mexicos domestic producers could not
compete on a level field with foreign firms that had access to money at cheaper
interest rates. As Mexico began to loosen its protectionist trade measures in the
1980s, pressure from the private sector for economic reform would increase.
Currency devaluation and internal inflation not only raised prices for the
domestic consumer, but for the domestic producer as well. Mexico was the third
largest U.S. trading partner in 1982. When the peso lost 70 percent of its value
relative to the dollar, it made it almost impossible for Mexican companies to continue
to purchase materials from the U.S.. One Connecticut machine-tool maker said in an
interview in a May, 1982 issue of Industry Week that his company was out of
business in Mexico for the time being:
Our distributor in Mexico has a good-sized inventory of machines, which he
must pay for in dollars. He hasnt got the money, cant raise prices on the

machines because of price controls, and probably couldnt sell them now
The manager of Ford of Mexico said in 1982 that the financial crisis hurt large
Mexican companies along with the rest of the business sector. He was quoted in
Industry Week as saying, Several huge Mexican companies are also in major trouble
because they borrowed billions of dollars abroad to finance expansions and start-ups
of new industries.129 American companies such as BF Goodrich and Cummins
Engine Co. were losing money due to the devaluation, and both companies were
laying off Mexican workers. According to Industry Week, the only companies that
benefited from the devaluation were the maquiladoras along the border, whose
primary cost of production was Mexican labor. Their effective wage rates were cut
from $1.99 per hour to $1.16 an hour.130 When unions threatened to strike after the
1982 devaluation of the peso, the government decreed wage hikes of between 10
percent and 30 percent, depending on the industry and the employees wage bracket.
As I already mentioned, wage hikes had the effect of offsetting the trade advantages
of a lower peso by inflating costs and prices within Mexico, but it also had the ironic
effect of hurting Mexicos small business sector. The president of the business group
CANACINTRA said in April 1982 in reference to government-mandated wage hikes
that, Only the big companies can afford the increase. The hardest hit will be smaller
companies, most of whose employees are in the low-income bracket and hence due
for bigger raises.131
As the anecdotes above suggest, the failure of devaluation to spur growth not
only raised the cost of living to the Mexican consumer, but raised costs of inputs for
Mexican businesses. Manufactured exports became uncompetitive, which in turn
made Mexican business more dependent on tariff protection and subsidies. The
growth of non-petroleum exports stalled and accounted for only about one third of
Mexicos total exports in 1981. To offset the rise in food prices, the government
instituted price controls on basic commodities, but rather than creating cheap food

this had the effect of discouraging agricultural production and creating shortages.
Mexico began importing grain to feed its population. As inflation increased and the
economy withered, Lopez Portillo instituted controls over banking and investment in
a desperate effort to control capital flight.
Capital Controls and a Crisis of Confidence
As annual inflation rose from 27 percent in 1981 to over 50 percent in 1982
and to over 100 percent in 1983, the growth rate of private investment turned
negative. In 1983 the annual pace of private investment was a negative 24 percent,
meaning that business was decapitalizing, and the money was being transferred
abroad. For the rest of the decade, inflation persisted at levels above 50 percent per
year, reaching a high of 132 percent in 1987.133 Combined with cutbacks in the public
sector forced by economic stagnation and the limits on foreign borrowing, real wages
and social expenditures declined. Using Nora Lustigs figures for annual average
rates of growth in real wages for the 1980s, workers suffered a loss of over one third
of their real earnings from 1980 to 1988.134 Real wages underwent a process that
paralleled capital flight from domestic businesses and securities: the working classes
shifted their sources of income away from wages to informal employment or to non-
wage income such as barter.
Having failed to achieve its aims through economic policy, the Lopez Portillo
government attempted to do so through force of law. In 1982 the regime imposed a
dual exchange system that pegged the peso near its market value (about 40 to the
dollar) for essential imports, but at an inflated 70 to the dollar for all other
transactions. These were the first exchange controls on money in Mexicos history. In
an effort to control capital flight, the government informed holders of $12 billion in
U.S. dollar accounts that they could only make withdrawals from their accounts at the
70-peso conversion rate. Later, the government instituted a full set of exchange

controls so that neither currency, jewelry or other valuables could be legally taken out
of the country. Naturally, the impact on persons with wealth was the opposite of what
the regime had hoped for, and Mexicans began smuggling their wealth out of the
On September 1, 1982, on a day when banks and public offices were closed,
Lopez Portillo publicly announced the expropriation of Mexicos privately owned
banks. This would be his last significant act as president. Three months later his
successor, Miguel de la Madrid, would take office to face the countrys slide toward
bankruptcy, saddled with the political fallout of the bank nationalization. Curiously,
Lopez Portillos dramatic act was motivated by political, rather than economic,
considerations. It represented an attempt to dodge the blame for years of
unsustainable economic policies by making bankers the villains in a public
pronouncement. It had no positive effect on Mexicos debt or balance of payments
problems.136 Its failure to resolve Mexicos capital shortage demonstrated that state
power over the economy was ephemeral. The state could not make an unsustainable
economic model viable through devaluation and capital controls. The bank
nationalization actually contributed to the crisis in part simply by eroding what
credibility the government had with the private sector. It precipitated a political crisis,
as the bank nationalization broke a traditional rule that a president near the end of his
term does not make sweeping changes that will affect his successor. Miguel de la
Madrid did not approve of the nationalization, but found himself in the awkward
position of having to deal its aftereffects: a crisis of confidence in the government and
renewed pressure for orthodox economic reforms.
The regimes loss of legitimacy was felt across class lines, as the unions and
popular sectors lost jobs and earning power while business lost profits and faced an
unpredictable economic environment. Capital flight is a warning sign of lack of
confidence in the economy, and in a state-controlled economy that equates to a lack
of confidence in the government. Currency controls and the nationalization of the

banks completed the rift between the ruling Party and the business community. The
business community accommodated itself to statist economic policies for years as
high tariffs, state control over finance, licensing and regulation all created a stable
and predictable environment for business. Mexicos development model provided
new investment opportunities as the country industrialized and diversified. Low
taxation and state-sponsored investment helped profitability. By the end of the 1970s
the rules of the game were rapidly changing, and the business community was re-
evaluating its relationship with the state.
Author Dan Cothran commented on the relationship between economic
growth and political support, saying that the business community expected many
things from the government, but the most important was a predictable climate for
business. He mentioned law and order, infrastructure, and provision of public goods
such as education, but these are important to all sectors of society. What the business
community needed in addition was a structure of economic regulation that allows it
to pursue profits in a relatively secure and predictable way. This was a feature of
the years of stabilizing development that disappeared under the populist
presidencies of the 1970s. During that decade economic policy had become reactive
and erratic as the state attempted to extend economic growth through oil exports,
borrowing, and capital controls. When the investment climate went from
unpredictable to hostile, the business community became politically mobilized.
Nationalization of the banks represented a violation of an implicit agreement
between the PRI and the business community that the government in respect to
private property rights. Nationalization was an indirect way to prevent capital flight
by making it impossible to withdraw ones savings or financial assets. It amounted to
a de facto confiscation of wealth, as deposits in pesos in Mexican banks lost their
value rapidly during the ensuing debt crisis and devaluation of the currency. In the
words of Jorge Castaneda, the action destroyed the complicity and convergence of
years past between the business elite and the political establishment. Not only did

it destroy the trust between business and the government, but alienated the middle
classes, who had a growing financial stake in Mexicos economy. The defection of
business and middle class groups from the PRI during the 1980s suggests that the
economic crisis would create a crisis of legitimacy for the PRI-dominated political
model itself. The business community had been alienated by the anti-business rhetoric
of the Echeverria and Portillo years, and reached an extreme in the wake of the bank
nationalization. Confidence in the regime was slow to return. Writing in 1987,
authors Levy and Szekely said, So severe was their alienation that it has not been
overcome even as the regime has moved away from leftist-oriented reforms.139
Business groups, in the words of one Mexican historian, were traditionally not
"grupos de presion" but "grupos de expresion."140 With the split in the ruling
consensus and the polarization of Mexican society this began to change. Business
criticized not only government economic policy, but the political system itself. The
erratic management of economic policy discouraged investment because of the
difficulty of investment planning. The alliance of the business community with the
state had involved a tradeoff of freedom of economic activity and property rights in
exchange for economic benefits, but during the Echeverria and Lopez Portillo
administrations government policy tipped toward the unions and the popular sector.
The costs of the alliance with the government exceeded the benefits and business
groups began to call for modernization of not just the economy but of the political
system in order to limit the authority of the president. The PAN called for competitive
elections and the abolition of the corporatist system of representation within the PRI.
Ironically, dissatisfied workers and members of the political left were making the
same demands, as they perceived that the government was not effectively
representing their interests either. As business groups called for the elimination of
exchange controls and return of the banks to private ownership, labor called for the
cancellation of the legal registration of COPARMEX.141

When the political consensus began to fall apart in the Lopez Portillo sexenio,
three business groups became channels for private-sector political activity against the
PRI and the government. They were, first, the Confederation de Camaras Nacionales
de Comercio (CONCANACO), which was probably the association of the largest
private industries and businesses. Second was the Confederation Obrera Patronal de
Mexico (COPARMEX), the Mexican employers association that had been formed in
the 1920s to organize in response to federal labor laws. Third was the Confederation
de Camaras Empresariales (CCE), founded in 1975 by the Monterrey industrial
group as a response to Echeverrias economic policies.142
The business community, particularly those who did not benefit directly from
state subsidies, had long been frustrated with government fiscal policy and with the
anti-business rhetoric of presidents Echeverria and Lopez Portillo. They would blame
the persistent government deficit in the mid-1980s on a lack of commitment by the
Miguel de la Madrid administration, even though deficits and inflation were due to
policies in place years before the new presidents arrival in office. The organized and
newly energized sectors of the business community, along with traditionally
conservative elements such as the Church, transformed the PAN from a loyal
opposition party to an aggressive opposition party intent on taking elections away
from the PRI. The Although the PAN is often identified with business interests, the
party began to get the middle-class vote in the mid-1970s. They elected officials to
offices in the industrial cities of Mexico City, Guadalajara, Monterrey and Puebla.143
The opposition of the right and the middle classes would present an increasingly
thorny problem for the PRI during the 1980s, when austerity measures would erode
the Partys traditional base among unions and the campesinos. After the failed
presidential election of 1988, the PRI would find itself increasingly dependent upon
the PAN for support of its policies of privatization and neoliberal reform. The 1980s
represented a significant transition of the Partys base of support as the austerity

measures of the Miguel de la Madrid administration brought the government into
conflict with labor and the left.
Austerity and Reaction
One of the important lessons of Mexicos half-century experience with a state-
dominated economy is that the political process does not do a good job of matching
economic rewards with economic productivity. A political model based on corporate
representation, the use of economic rewards for patronage, and the growth of a self-
interested state bureaucracy all contributed to an institutionalized rentier ethos
discussed in chapter two of this paper. The result was a seemingly irreversible
competition for public money among politically relevant groups. With that
competition came the vanishing consensus and increasing political challenges to the
inclusive-authoritarian state. Patronage relationships and the inclusive-authoritarian
model had worked reasonably well together to keep the peace among the official
sectors through the 1970s. When economic resources became scarce the regime had to
choose between austerity, which threatened regime legitimacy, or unsustainable
economic policies, which also threatened regime legitimacy although in a longer
time frame. Mexican presidents chose the latter course, as the threat was less
immediate, and deficit spending more expedient. There was always hope that things
would resolve themselves, or at least that a crisis would come under a future
The measures the Echeverria and Portillo governments took to stimulate the
economy were effective only for a limited time. Economic growth was ultimately
dependent on sound management of the economy as well as on distributive efforts.
The political support purchased by the expansion of state programs was ephemeral,
and was lost in the ensuing years of financial retrenchment. The drop in oil revenues in
1982 left Mexico in a severe recession, with no resources to buy its way out of debt.

With a limited choice of policy options, De la Madrid devalued the peso to make
Mexican exports more price competitive, even though this raised the cost of imported
goods and merchandise. The table of Mexicos economic statistics from 1973 to 1993
on page 116 shows that in spite of austerity measures both foreign debt and inflation
continued to rise through the 1980s.
The financial collapse of 1982 shattered the fafade of unity among the
corporate sectors, and drastically changed the governments political priorities. Unable
to purchase consensus, the de la Madrid government began the transition toward
economic and political reform in the hope of achieving a wider base of popular
support. The transition would be politically divisive and would initiate a profound
change in the states role in the economy. It is interesting that in a time of financial
crisis, it was the political fallout rather than the direct effects of debt and inflation that
posed the greatest challenge to the regime. Economic policy was dictated more or less
by events, whereas the response to the popular unrest generated by those economic
problems was more discretionary and more problematic. As authors Roberto Newell
and Luis Rubio note in their book, Mexico's Dilemma: The Political Origins of
Economic Crisis, Sheer political pragmatism... lies at the core of the ongoing
economic reform; not reforming had become as disruptive as reforming.144 The main
problem the regime faced during the 1980s was that its economic reform program
altered the relationships between the diverse actors in the political system. As these
relationships deteriorated, Mexico was faced with a vanishing consensus among the
members of the revolutionary family.145 This chapter will explore the aftereffects of
economic collapse, particularly the confrontation between the state and its traditional
base of support in the labor sector. Dissatisfaction with the states austerity measures
would fragment this political base, and finally the Party itself. That fragmentation
would lead to the defection of the left wing of the PRI on the eve of the 1988
presidential election.

When economic crisis could no longer be averted, the government began a
transition away from the state-directed economic project. The globalization of
manufacturing and finance, as well as the rise of small business and an urban middle
class within Mexico were creating pressures for both political pluralism and for a more
competitive economic model. Economic realities intruded into political priorities. The
result was a shift away from state ownership of industries and extensive state
involvement in development and subsidized consumption. Privatization and
introduction of orthodox economic philosophies at the top level of government meant
a reorientation of economic priorities away from maximizing employment, co-optation
of labor and protection of domestic industry. Political and economic reform would
introduce competition to the private sector, greater accountability to parastatal
enterprises, and greater public scrutiny of the electoral process. These changes
represented concessions by the regime to both economic realities and popular pressure
for change. In that sense, the regime reformed out of self-interest. At the same time,
the reforms benefited the public at large, as opposed to any particular interest group.
Leaders of the official sectors, most labor unions, and the much of the state
bureaucracy opposed these changes, as they implied a reduction in their influence over
public policy. Popular groups that felt the effects of the transition to orthodox
economic policy also resisted these changes, as they meant a loss of job security and
wages. Dissention between labor, government and private industry grew more intense
as the economic transition of the 1980s progressed.
When Miguel de la Madrid took over the presidency in December 1982, his
predecessor, Lopez Portillo, had already signed an austerity agreement with the IMF.
Austerity would mean a reduction in state social spending, reduced development
initiatives, and a reduction of the overstaffed and inefficient parastatal sector. De la
Madrid inherited an economy in recession (negative growth in GDP), and an inflation
rate of approximately 100 percent.146 He did not have the benefit of oil revenue and
loans to cushion the blow of economic austerity. Those funds had been spent, and oil

would not regain the price levels of the early 1980s for nearly twenty years. Oil prices
fell in 1985 from an average of $25 per barrel in January to about $10 by early 1986.
This represented a loss of about $2 billion U.S. dollars to the Mexican treasury.147 To
make matter worse, in 1985 earthquakes devastated large portions of Mexico City and
required emergency federal spending. Reconstruction efforts cost about $4 billion in
U.S. dollars.148
Austerity meant less government spending, but also less government support
for demands on the private sector for higher wages and benefits. The Miguel de la
Madrid administration used its traditional mechanisms of control to suppress wage
demands from the unions: voiding or modifying collective bargaining contracts,
declaring unofficial strikes illegal, and when necessary calling in the military to evict
striking workers from the factories. These measures alienated labor from the
governing alliance, but did not provide an offsetting benefit of winning back the
confidence of business groups, who felt they had been betrayed by the populist
policies of the Echeverria and Lopez Portillo administrations. Business confidence was
particularly slow to return after the unexpected nationalization of the banks in 1982. In
the environment of economic austerity, it seemed that the regime could please none of
its traditional client groups. A favor to one implied fewer resources for another, and
spending for all not only alienated the business community but went counter to the
governments inflation-fighting agenda. In the end, policy was dictated by economic
circumstances. In the face of rising prices, falling revenues, and increasing debt, the
administration cut the federal budget on three occasions, 22,000 bureaucrats lost their
jobs and 80,000 positions vacated over the previous two years went unfilled in the first
three years of the new administration. Even at the highest level, the government cut
back on personnel, vacating the positions of 15 undersecretaries and 50 assistant
undersecretaries. 149
As his predecessors had done, Miguel de la Madrid attempted to hold the
revolutionary family together through discipline and appeasement. In the 1980s this

meant continuing the privatization of major state industries and reduction in
government spending, while still defending the role of the state in economic planning
and development. In a speech in the first year of his administration, the president said,
I must strengthen the basic principles of the mixed economy, which start from the
premise that the government is responsible for the nations economic development.150
He evoked revolutionary symbolism and nationalism in defense of the states role,
saying Planning is a revolutionary task because it is the exercise of reason, liberty and
will for social change... Planning is above all nationalistic. 151 This public
commitment to the states role in the economy was rhetorical, as it implied a
continuation of policies of protection and subsidy. Those policies had become
unsustainable, and required de la Madrid to adopt policies inconsistent with his
election-year rhetoric. By 1986 the President would reverse himself and announce
publicly that, our austerity effort is permanent. 152
De la Madrids policy planners saw a difficult transition period of about two
years to bring inflation and the debt crisis under control, after which economic
recovery would allow a resumption of public sector growth and employment.
Consequently, the new president promised the largest umbrella organization for urban
workers, the Confederation of Mexican Workers (CTM), that he would not reduce
levels of employment or state spending. He hoped to avoid an open conflict with labor
through the understanding between the government and the unions that austerity would
only be necessary for a limited time. Still, labor did not immediately acquiesce to the
new orthodox model. In 1983 the CTM called for a 50 percent wage increase for all its
members, and backed its demand with 3,000 strikes.153 This was not yet a political (
crisis for the government, but rather part of the historic pattern of dissent and co-
optation. The government conceded some wage increases and non-wage benefits such
as subsidized housing, basic commodities, and an increase in worker profit sharing. It
took another four years of economic stagnation and inflation to bring labor dissent to

the point where large elements of the popular sector were prepared to defect from the
ruling coalition.
The political problem that fiscal austerity created for the government was that
the demands for wage increases and maintenance of the public enterprises ran directly
counter to the governments debt-service and inflation-fighting strategies. Not just
labors demands, but the traditional method of policymaking through personal
influence and bargaining was at odds with the technocrat approach to rational
economic policymaking. Despite negotiation, it seemed that the Mexican government
could not keep its support among the popular sectors and simultaneously institute
economic policy based on market mechanisms. Here was the link between Mexicos
economic problems and the breakup of the political consensus. Ruth Collier made the
connection between free market policies and the erosion of the political base of the
Specifically, policies that promoted competitiveness and efficiency, the
program of privatization, and the commitment to market mechanisms were at
odds with the maintenance of real wage, employment and unionization levels,
as well as social welfare policies. Ultimately, both the technocrat policy-
making style and the substantive policy orientation contradicted the state-
labor alliance and the social pact, which had been the bedrock of the Mexican
The President began moving away from protectionist economic policies in
1985 when the government announced it would enter into the General Agreement on
Trade and Tariffs (GATT) in the face of opposition from labor and small businesses
groups. That year the government reduced the number of imports subject to licensing
from 75 to 38 percent of total imports. After the recession of 1985-1986, tariff
barriers were lowered further. In 1987 tariffs were lowered another 20 percent on
most products.155 The government also reduced subsidies on domestic commodities
and industrial inputs, letting the prices come closer to market levels. Even basic
foodstuffs, bus fare, and utility prices were allowed to rise. De la Madrids public
commitment to a mixed economy was kept alive, but state planning no longer meant

increased state ownership of industry. Economic realities collided with the mixed
economy model, and the state began to sell its stake in public enterprises. By mid-
1988, the government had sold its interest in two-thirds of a list of 765 state or
parastatal firms, even though the firms on the list accounted for only a small
percentage of the total state sector.156 It was a symbolic and political victory for the
reformist tecnicos in the administrations finance sector and other neoliberal
advocates within the government. The success of privatization would encourage
further orthodox reform under the Salinas de Gortari presidency.
The press often referred to the combination of neoliberal reforms pushed by
presidents Miguel de la Madrid and Salinas simply as the economic modernization
project.157 This acknowledged that the agenda was broader than simply a reduction
of spending. As the entry into GATT and subsequent reduction of tariffs indicated,
one of the administrations economic objectives was to integrate the Mexican
economy into the world economy. This in turn implied making Mexican business
more competitive by reducing its dependence on state subsidies and financing. The
reduction of the parastatal sector was integral to this effort. The reduction of
government spending and privatization of inefficient public or parastatal firms was
the first, and perhaps most obvious, point at which to attack the governments fiscal
problems and reverse the trend toward funding deficits with borrowed money. The
combination of reduced subsidies, lowered tariff barriers and privatization of state
enterprises was a package of economic policies designed to attract (or repatriate)
investment, and foster private-sector growth. It was a shift toward an economic
growth policy that rested on the private sector. It implied a reduction in the states
role in economic development, and a subsequent reduction of the nationalist focus of
state economic planning. The reduction of the states role in the economy would lead
to a reduction in the states role in the employer employee relationship, and leave
the labor sector with reduced political influence.

Privatization and the Confrontation with Labor
Economic modernization involved a decentralization of economic decision
making, and a consequent reduction of political influence over the internal affairs of
business. In that respect, economic reform had a political component. Neoliberal
economics implied a reduced role for the labor sector and the bureaucracy in
influencing wage levels and tariffs. It also limited their influence over the internal
affairs of state and private enterprises. This was openly acknowledged in the Mexican
press. One author noted in a 1991 NEXOS article that the modernization policies of
the de la Madrid administration had reduced the prerogatives of labor unions, or
sindicatos, as they were called in the Mexican press. He added that it limited their
ability to interfere in the policies of their employers. The reduction m labors
influence over economic policy was a deliberate feature of economic
modernization, but it had political repercussions that reverberated down through the
labor sector. The unions did not liave a united response to their loss of influence, yet
felt the loss of real earning power as wages failed to keep pace with inflation. Some
groups offered to compromise of cooperate with the governments anti-inflation
efforts while others resisted.
Since 1983, the first year of Miguel de la Madrids sexenio, the Secretary of
Labor and union heads had split over issues of wages. The friction created a split
within the PRI itself as Party officials loyal to labor and CTM delegates in the Party
resisted the administrations anti-inflation policies. Miguel de la Madrids Secretary
of Labor wanted the labor sector to accept lower wages to help bring down the rate of
inflation, which was hovering near 100 percent in 1983 (see table, Mexico:
Economic Statistics 1973 1993, page 116). The CTM leadership and its Party
delegates resisted, and pushed for wage increases to match the rising cost of living.
There was understandable pressure from the union membership to maintain wage
increases as prices rose, and this created a dilemma for the PRI as it confronted an