The Impact of Neoliberal Policies on Mexico from 1982-1994

1 The Impact of Neoliberal Policies on Mexico from 1982-1994 Paige Berges 2 I. Abstract This paper examines first the broad principles of globalization as they have progressed throughout the latter half of the 20th Century, and further how globalization has been defined by neoliberal economic theory beginning in the 1980’s. General theoretical objections to neoliberalism are raised, and a case study of Mexico is used to illustrate the actual effects neoliberal reform has had on economic stability and the standard of living within the country. II. Literature Review Globalization is a fact that few citizens of the world would deny. It has been occurring for hundreds of years, and with increased technology, the rate of communication and travel has pushed the world in to a level of high contact and great economic interdependence. 1 But what does “globalization” mean? How has the world been shaped by its forces? Quite simply, globalization can be described as a process of increased inter-global communication, a greater exchange of ideas, goods, and even populations. 2 The expanding global economy is probably the clearest illustration of these global forces at work, and is the area to be examined in this paper. Globalization is often blamed for a host of problems across the developing world: inequality in income among and within nations, as well as political and economic instability. There is an important distinction for the purposes of this study, as it is purported that it is not globalization itself that is to blame for economic ills, but instead it is the framework in which economic internationalization has been occurring. 3 Capitalism is often credited as the main driving force of economic globalization, and for a variety of reasons, this notion can be clearly illustrated. Capitalism is an economic theory that focuses on the accumulation of surplus, subsequent reinvestment, and even higher surplus gains. In the international arena, capitalist economies such as the United States, Britain, and the other developed states, have in fact needed to pursue economic overseas in order to continue capitalist production and profit.4 Few propose a stop to this globalization (indeed it seems highly improbable that it could be stopped, let alone reversed), however, there have increasingly been a number of objections to the current means in which economic globalization has been occurring. The general theoretical framework in which global economic development has been occurring is known as “neoliberalism,” promoted and embodied most notably by some supranational organizations such as the World Bank and the International Monetary 1 Shah, Anup. “Free Trade and Globalization: Criticisms of Current Forms of Free Trade.” 2003. http://www.globalissues.org/TradeRelated/FreeTrade/Criticisms.asp. 2 Quiggan, John. “Globalization and Economic Sovereignty” The Journal of Political Philosophy. Vol. 9, Num. 1, 2001, pg. 56-80. Retrieved 11 Feb. 2004 from EBSCOhost database 3 Henwood, Doug. “Beyond Globophobia: Instead of blaming globalization for our economic ills, why not take it over?” The Nation. 12/1/2003. Retrieved 14-Jan-2004 from EBSCOhost database. 4 Scholte, Jan Aart. Globalization: A Critical Introduction. New York: St. Martin’s Press: New York. 2000. See also: Wade, Robert Hunter. “The American Empire”. The Guardian. Jan. 5, 2002. http://www.guardian.co.uk/globalisation/story/0,7369/627922,00.html 11-Jan-2004 3 Fund. The cornerstone of this theory is essentially that of age-old liberalism, the market, in which all transactions should take place. Trade should be free of interference from the state, the idea being that operation the market will most efficiently and rightly determine distribution of wealth and profit. What differentiates the liberalism of Adam Smith and the neoliberalism of today is the shear enormity, complexity and insatiability of transactions. 5 Neoliberalism has been hailed as not only plain common sense, but also as inevitable. It promises an integrated global economy that will in the long run work to the advantage of all. 6 One of the assumptions upon with neoliberal theory relies is that of “comparative advantage.” Developing nations have comparative advantage in production (as a result of cheap labor), and as exporters of raw materials, while the technology and capital for production is provided by industrialized nations.7 Developed nations and rich multinational corporations are essentially able to buy resources at minimal price, selling back the finished goods for higher, expanding an already clear wealth gap. Many argue that the process of globalization is in truth a continuation of colonialism and mercantilism of the past. 8 Indeed, the Third World, or peripheral countries, has been integrated in to the world economy as “marginalized” countries, debtor nations and exporters of raw materials to the core, or First World, nations. This is undoubtedly an adverse position, and leaves these peripheral nations essentially at the whim of the core, as they find themselves wholly dependent upon foreign investments.9 According to Chalmers Johnson, author of The Sorrows of Empire, neoliberal economic policies were at their inception a mere nicety to disguise America’s hegemonic aims, as well as to feed the capitalist machine. He argues that neoliberalism itself has been cleverly cloaked in the guise of an inevitable and worthwhile economic theory, when in truth it is “conscious policies of Anglo-American elites trying to advance the interests of their own countries at the expense of others.” 10 Neoliberalism is presented as both common sense and inevitable, a difficult theory to contest as implementation is in the hands of powerful multinational corporations, stockholders, rich entrepreneurs, powerful domestic politicians and the like.11 Dani Rodrik refers to globalization as 5 “Neoliberalism: origins, theory, definition.” 2003. http://web.inter.nl.net/users/Paul.Treanor/neoliberalism.html 6 Johnson, Chalmers. The Sorrows of Empire. 2004. New York: Metropolitan Books. See also: Bourdieu, Pierre. “The essence of neoliberalism”. http://mondediplo.com/1998/ 12/08bourdieu 7 Handelman, Howard. The Challenge of Third World Development. New Jersey: Prentice Hall, Pg. 273 8 Shah, Anup. “Free Trade and Globalization: Criticisms of Current Forms of Free Trade.” See also: “Neoliberalism: origins, theory, definition.” 2003. See also: DeMartino, George E. Global Economy, Global Justice: Theoretical objections and policy alternatives to neoliberalism. 2000. New York: Routledge. 9 : Munck, Ronald. “Neoliberalism, necessitarianism and alternations in Latin America: there is no alternative (TINA)?” Third World Quarterly. Vol. 24, No. 3, pg. 495-511, 2003, pg. 497. Retrieved from EBSCO database. 10 Johnson, Chalmers. The Sorrows of Empire. 2004. New York: Metropolitan Books. See also: Shah, Anup. “Causes of Poverty: Structural Adjustment- a Major Cause of Poverty.” http://www.globalissues.org/TradeRelated/SAP.asp 10-Feb-2004. 11 Bourdieu, Pierre. “The essence of neoliberalism.” See also: Wade, Robert Hunter. “The American Empire.” The Guardian. Sat. Jan. 5, 2002. http://www.guardian.co.uk/globalisation/story/0,7369,627922,00.html 11-Jan-2004. 4 operating on a “skewed agenda” which benefits the developed nations over the Third World it is supposed to help. 12 Although we cannot the true motive behind the implementation of neoliberal policies in developing countries, we can examine the effects neoliberal reforms have had upon the economies and societies of the developing world. Poverty levels among not only developing, but also developed countries have increased, the income gap among the world’s richest and poorest has widened immeasurably. Overall wealth in the world has grown, but it is concentrated in the hands of the few, pushing standards of living down for more and more of the citizenry of the Third World nations.13 In fact, the richest 1 percent of the world’s population possesses as much wealth as the poorest 57 percent.14 Between 1980 and 1998, half of the developing countries exhibited a reduction of real per capita GDP. 15 Even the World Trade Organization has found that inequality between the First and Third World countries has grown, the GDP of the richest countries having grown to 30 percent of that of the poorest 20.16 Conservative neoliberal economists claim that increased inequality is an inevitable and necessary by-product of economic development, but that absolute economic growth in and of itself is good for the poor.17 The World Bank article, “Growth is Good for the Poor,” sums up this view stunningly. It is important to understand that in finding that average incomes of the poorest fifth of society rise proportionately with the overall average, the authors’ analysis is of per capita GDP, a statistic that is often unrepresentative of actual income distribution. Neoliberal economists claim that there are many explanations for this increased inequality besides simply trade liberalization, however, noting that the richest countries also exhibit the highest levels of education and training.18 While this is true, it should be noted that a key element of neoliberal domestic policy, is the privatization of all forms of social welfare programs, such as those of health and education. 19 This requirement of neoliberalism is difficult to reconcile with those who claim that income distribution is the product of domestic institutions, not the fault of international forces, since it can be argued that global neoliberalism limits the array of domestic policy choices. Unions and popular pressure may be fully present in the Third World, but it becomes too difficult for policy makers to respond. Income redistribution policies, for example, are essentially anathema to the neoliberal creed, as they would harm the interests of the rich, whose investments are urgently needed.20 12 Rodrik, Dani. “After Neoliberlism, What?” Alternatives to Neoliberalism. May23-24,3004. Retrieved from EBSCOhost database. 13 Black, Maggie. The No-Nonsense Guide to International Development. 2002. New York: Verso. See also: Munck, Ronald. “Neoliberalism, necessitarianism and alternations in Latin America: there is no alternative (TINA)?” 14Black, Maggie. The No-Nonsense Guide to International Development. See also: Li, Minqi. “After Neoliberalism: Empire, Social Democracy or Socialism.” 15 Li, Minqi. “After Neoliberalism: Empire, Social Democracy, or Socialism?” 16 Does More International Trade Openness Worsen Inequality?” 17 Handelman, Howard. Pg. 281 18 “Does More International Trade Openness Worsen Inequality?” http://www.worldbank.org/html/extdr/pb/globalization 2-Feb-2004. 19 Quiggan, John. “Globalization and Economic Sovereignty”. The Journal of Political Philosophy. Vol. 9, Number 1, 2002, pg. 56-80. 20 Soederberg, Susanne. “State, Crisis, and Capital Accumulation in Mexico.” Historical Materialism. Vol. 9, Pg. 61-84, 2001. Retrieved from EBSCOhost database. 5 In any case, from these statistics it is clear that Third World countries that have adopted these policies have yet to exhibit the promised and assumed degree of success in two of the most important states goals: poverty and inequality reduction, as well as increased economic stability. In no uncertain terms, an increasingly global world is an increasingly unstable world. The availability of communications and quick transactions has made the risk of capital flight a reality. Proponents of neoliberalism insist that it is far more the fault of institutions within the developing states, which has hindered the success of the free market 21. The World Bank report points to the principle, consistent with prevalent economic theory, that with greater openness some sectors of the economy will inevitably falter in the face of global competition, while others will prosper. Along these lines it stands to reason that depending upon the socio-economic conditions prior to liberalization, a country will either benefit or be disadvantaged by the free trade policies.22 This theory does not completely tell the story, however, as in the aforementioned increasingly unstable world, it is more and more the case that markets can generate “irrational bubbles” and “excess volatility,” even without fault of domestic economic policy.23 It can even be said that simply fear that a crisis is imminent could prove to be the actual cause of a crisis. 24 Thus it is not clear what is the true cause of economic instability and growing inequality among the developing world. Are neoliberal policies themselves to blame? Or is their success somehow affected by their implementation, and to what degree? An important point raised by Doug Henwood, contributing editor of the Left Business Observer, is finding globalization the culprit of increased inequality and instability truly depends on how one’s variables and measurements are defined. 25 In 1982, Mexico was subject to a financial crisis, which was largely blamed on the country’s focus on import substitution industrialization strategy. ISI required high domestic controls, tariffs, and subsidies, as well as the importation of expensive manufacturing tools. 26 It began in large part as a response to international economic crisis in the developing world, which had left the country unable to export the traditional products they relied upon. The result of this policy, however, was a bloated government structure, whose investments were funded by foreign debt. This led in short order to a balance of payments crisis, as the Mexican government had over-borrowed. 27 The IMF then stepped in, providing a loan package with a number of financial, monetary and structural reforms attached. 28 80 percent of Mexico’s state enterprises 21 Flores-Quiroga. “The Economic Crisis and the Mexican State: Toward a New Institutional Interpretation.” 2001. See also: Henwood, Doug. “Beyond Globophobia.” 22 “Does More International Trade Openness Worsen Inequality?” 23 Quiggan, John. “ Globalization and Economic Sovereignty.” 24 Delong, Bradford. “What Have We Learned from the International Financial Crises of the 1990s?” 25 Henwood, Doug. “Beyond Globophobia.” 26 Handelman, Howard. “The Political Economy of Third World Development.” 27 Flores-Quiroga. “Economic Crisis and the Mexican State.” Mexican Studies. Vol. See also: Handelman, Howard. “The Political Economy of Third World Development.” The Challenge of Third World Development. Pg. 266. 28 Soederberg, Susanne. “Grafting stability onto globalisation?: Deconstructing the IMF’s recent bid for transparency.” Third World Quarterly. Vol. 22, No. 5, pg. 849-864, 2001. Retrieved from EBSCOhost database. 6 were privatized, causing approximately 400,000 people to lose their jobs. 29 Foreigners were allowed to own 100 percent of countries in Mexico, as well as purchase land. All previous attempts at land or income redistribution were ended. 30 During this time, income inequality as well as absolute poverty increased. Purchasing power decreased, as prices went up along with the world marketplace, but wages remained the same.31 According to Flores-Quiroga, it was the response of the Mexican government that explains the lack of success following the neoliberal reforms. First, the author criticizes Mexico’s reliance of simple “laissez-faire” economics, without involving the government enough to protect the budding markets, or to invest in education, and other forms of “social justice.” 32 This does seem to be exactly the problem, and neoliberal critics support this conclusion. The real issue is thus that the IMF structural adjustment policies that Mexico needed to accept before loans were made to bail the country out actually require fiscal austerity and a subsequent reduction of social spending. 33 Flores-Quiroga also points to the need for better tax policies, but the propositions for tax reform look dim. A “value added tax” would fall heavily on the already poverty-stricken, while the needed progressive tax would more than likely drive the rich and their investments capital to other markets.34 For a country whose entire existence in the world economy hedges upon foreign investment, this is an impossible move. The claim that income distribution depends upon domestic institutions may be true, but in the face of IMF austerity requirements and the need to garner support of the rich; poverty, inequality and instability are the fault then of external forces. There is some support for the argument that institutions contributed to Mexico’s economic woes, namely in the onset of the 1994 financial crisis. 35 For example, it has been said that banks were not held accountable for a number of risky practices. 36 It can be said, however, that the throes of neoliberalism were at least in part at fault for the highly speculative nature of investments. The term “moral hazard” has been coined to See also: DeLong, Bradford. “What Have We Learned from the International Financial Crises of the 1990s?” http://www.j-bradford-delong.net/TotW/learned.html See also: Fourcade-Gourinchas, Marion, Babb, Sarah L. The Rebirth of the Liberal Creed: Paths to Neoliberalism in Four Countries , , American Journal of Sociology, 00029602, Nov. 2002, Vol. 108, Issue 3. Retrieved 10- Feb.-04 from EBSCOhost database. 29 Handelman, Howard. “The Political Economy of Third World Development.” The Challenge of Third World Development. 30 Flores-Quiroga. “Economic Crisis and the Mexican State: Towards a New Institutional Interpretation.” 31 Corbacho, Ana and Gerd Schwartz. “Mexico: Experiences With Pro-Poor Expenditure Policies.” See also: Lopez-Acevedo, Gladys and Angel Salinas. “How Mexico’s Financial Crisis Affected Income Distribution.” 32 Flores-Quiroga. “Economic Crisis and the Mexican State.” See also: Scholte, Jan Aart. “Globalization: A Critical Introduction.” 33 Shah, Anup. “Causes of Poverty: Structural Adjustment- a Major Cause of Poverty.” See also: Li, Minqi. “After Neoliberalism?” Pg. 23. 34 Soederberg, Susanne. “State, Crisis, and Capital Accumulation in Mexico.” See also: Corbacho, Ana and Gerd Schwartz. “Mexico: Experiences With Pro-Poor Expenditure Policies.” Jan. 2002. http://www.imf.org 35 Gil-Diaz, Francisco. “The Origin of Mexico’s 1994 Financial Crisis.” The Cato Journal. Vol. 17. No. 3. http://www.cato.org/pubs/journal/cj17n3-14.html 26-Jan-2004. 36 Kuttner, Ken and Rafael M. Samano-Palacious. “The Mexican Financial Crisis: A Case Study.” 1996. See also: Gil-Diaz, Francisco. “The Origin of Mexico’s 1994 Financial Crisis.” The Cato Journal. Vol. 17, No. 3 7 describe the increased risks taken by borrowers and lenders based on their knowledge that the International Monetary Fund will simply intervene in a crisis, ensuring repayment of debts that may have caused the crisis in the first place.37 It is a difficult situation because in Mexico the high level of capital investment was necessary to finance its trade imbalance and continuously repay foreign debt. 38 The few cases of success in the developing world, namely China, Vietnam, and India, are exceptions, especially considering that they themselves did not strictly adhere to the tenants of neoliberalism: 39 The United States itself did not, at its inception adhere to Former World Bank chief economic, Joseph Stiglitz has noted that developing countries in fact may need to retain domestic capital controls in order to achieve a measure of financial stability. Stiglitz has said that the “trick” to avoiding the typical fate of the developing world is to “tell the IMF to go packing.” 40 It is often the claim of pro-IMF and World Bank analysts that neoliberalism will cause short-term problems, but will in the long term exhibit great benefit for all. 41 There is something to be said, however, for John Maynard Keynes famous quote, “In the long run we’re all dead.” The term “IMF riots” has been coined in response to the growing number of vocal discontents in the wake of structural adjustment policies. 42 Indeed, in Mexico the 1994 Chiapas revolt was indicative of discontent at increasing unemployment combined with decreasing social expenditure. 43 According to Joseph Stiglitz, the IMF riot is called “Step 3 and a half” of the IMF’s “Four Steps to Damnation” 44 Neoliberal reforms in Mexico and the world came about due to the long history of protectionism and strong government that yielded collapse. However, just because the system happened to fail does not mean that neoliberalism is the inevitable only right path. Much of the debate simply lies in finding the correct balance between neoliberal reforms and the protectionism of the past 45 Dani Rodrik suggests that the World Bank and IMF abandon attempts to define an overarching theory to apply to all states, and instead consider the unique institutions and cultural settings of different regions in order to allow the countries themselves to design an effective economic plan. 46 The search for alternatives to neoliberalism should be the next question. 37 Krol, Robert. “The Case for Open Global Capital Markets.” See also: Kuttner, Ken and Rafael M. Samano-Palacious. “The Mexican Financial Crisis: A Case Study.” See also: Kalter, Eliot and Armando Ribas. “The 1994 Mexican Economic Crisis: The Role of Government Expenditure and Relative Prices.” IMF Working Paper. 38 Soederberg, Susanne. “Grafting Stability onto globalisation? Deconstructing the IMF’s recent bid for transparency.” 39 Rodrik, Dani. “Find option to neoliberalism or seek to prevent its abuse.” See also: Johnson, Chalmers. The Sorrows of Empire. 40 Palast, Gregory. “IMF’s Four Steps to Damnation.” 41 Anderson, 42 Shah, Anup. “Causes of Poverty: Structural Adjustment- a Major Cause of Poverty.” 43 Rosset, Peter. “Understanding the Chiapas Revolt in Mexico.” Third World Network. http://www.independence.net/home/chiapas/htm 17-Mar.-2004. 44 Palast, Gregory. “IMF’s Four Steps to Damnation.” 45 Handelman, Howard. The Challenge of Third World Development. 46 Rodrik, Dani. “Find option to neoliberalism or seek to prevent its abuse.”/”After Neoliberalism, What?” 8 III. Methodology The question this paper seeks to examine is whether or not neoliberal economic policies were successful in Mexico. Neoliberal policies are those structural adjustments enforced by the International Monetary Fund in the developing world as conditions to the provision of loans. These structural adjustments include 1) privatization of industry, health, and education, 2) free trade (elimination of tariffs or other barriers and deregulation of prices), and 3) fiscal austerity (reduction or elimination of social spending). To determine the definition of “success,” I examined the rhetoric of international economics, beginning with the first seeds of globalization. Globalization simply refers to the process of intercommunication and interdependence across the world, a process that was institutionalized in great measure by the Bretton Woods agreements following World War II. The ideology of these agreements was not so much as to achieve maximum economic growth, but more to achieve growth in the context of equal distribution and maximization of human development and standards of living. Another original aim was to improve upon the welfare of the world’s population, focusing on the need for full employment, adequate public services as well as infrastructure (Quiggan 63-64). To this point I will find further definition from the UN Human Development Index and analyze per-capita GDP, and education. Although per-capita GDP is not always the most accurate measure of well-being, it is nonetheless a relevant figure. Education is measure of adult literacy and gross enrollment, and is an indicator of government expenditures in social programming, with important implications for poverty levels (Corbacho and Schwartz 19). Another statistic I will examine is the gini coefficient, which is an indicator of income inequality. All of these measures will be noted from 1980 (before the structural reforms of the International Monetary Fund) until 1994 (before the financial crisis, reflecting the effect of the neoliberal policies). The main thrust of this essay is the question of effects on human life, but another goal of the Bretton Woods system will also be considered, and that is the creation of stable economic system designed to avoid the crises as occurred throughout the world, and in Mexico in 1982. There is no denying that a crisis did indeed occur in Mexico, even after neoliberal reforms supposedly designed to avoid such economic instability. To discover if it is the fault of neoliberal policies or of internal failure, I will simply examine a range of very different sources documenting possible causes of the crisis. 9 IV. HISTORICAL CONTEXT It is difficult to determine when globalization began. If one conceptualizes globalization as the simple contact across states through conquest, trade, and other means, then globalization stems since the Roman Empire, perhaps even before. Globalization as it is modernly referred to, however, is in the succinct context of world economic integration. Such economic integration has occurred most noticeably in the realm of international trade, especially with the movement towards reduction of tariffs and barriers to free trade. Another key example of economic globalization can be noted in the increased amount of capital exchange, investments and transfers of wealth across national boundaries. Much of this increased interaction is possible only due to the technological innovations of the 20th century. The growth of technology has allowed for rapid travel, communication, as well as rapid capital exchange through electronic and computerized banking. This technological precondition of modern globalization has tended to set the typical definition of globalization as including modernization and technicalization (Scholte 15,16, 66, 74). Thus, the definition that is important for this paper can also be said to be that of prevailing literature. Globalization is the expanded integration of global markets, as evidenced by freer trade of goods, services and labor, as well as by the augmented frequency of capital exchange (Quiggan 1). This definition is rather simple to accept when it is noted that the primary incipient driving force of globalization was the economic theory, capitalism. The aim of capitalism is essentially to accumulate a surplus, be it of capital or other resources. These surpluses, or profits, are then re-invested in production so as thereafter generate greater surplus. Globalization therefore was a natural progression from capitalist theory, as the drive to accumulate required the addition a new resources and consumer markets. Capitalism is at it heyday in today’s world, as entrepreneurs have the ability to transfer production facilities to the lesser-developed nations where costs can be lowered, and profits are driven even higher. Additionally, the growth of technology has itself been a capitalist enterprise, with communication and travel systems representing a brand new market to exploit (Scholte 99). Another tenet of capitalism is the constant state of competition for resources and capital. In these ways, capitalism has been a driving force for in creating wealth, fostering technological and market innovation (Shah 1). When the Bretton Woods system was first conceived, the focus was on large governments, to provide a “welfare state.” This high degree of sovereignty was combined with laissez-faire capitalism to form a mixture between and a free and regulated marketplace. From 1945 to 1970, the developed countries exhibited a remarkable amount of success, positing great economic growth, expanding welfare provision, and low unemployment. However, as absolute incomes grew, so did demands for welfare, inducing governments, especially in the United States, to engage in deficit spending. Inflation rates rose rapidly in response to this full employment and high spending, a condition called “stagflation.” In addition, there were a number of oil crises and wars, 10 particularly in Vietnam, and the system fell apart. In response, a new economic theory was proposed: neoliberalism (Quiggan 65). V. THE NEOLIBERAL IDEOLOGY Neoliberalism is also known as the “Washington Consensus” to pay homage to those US visionaries responsible for its design. The main tenets are privatization, fiscal conservatism, deregulation of prices and exchange rates, in addition to the institution of free trade. It is meant for the same purpose as the Bretton Woods system: to generate growth, better standards of living, and importantly to avoid instability and collapse. The two world economic plans are similar too as both remain firmly embedded in the spirit of capitalism. Neoliberalism returns far more to the original aim of capitalism than did the mixed economies of the Bretton Woods era. The theory lauds market expansion without the regulation and extensive social spending of the past (“Neoliberalism” 6). The most innovative market to have developed is that of finance itself. Foreign exchange, securities and investments are now themselves means of accumulation. Means of financial dealing have essentially been “commodified.” As a proportion of foreign exchange, actual trade of goods counts for only 5 percent (1990), from 90 percent in the 1970s (Scholte 116-118). The sheer quickness and enormity of financial transactions has led to the coining of the phrase “global casino” (DeMartino 14) The immense amounts of capital flows worldwide have certainly led to impressive production and accumulation of wealth. Many ‘investors’ can in truth be deemed “speculators,” for their focus has been on short-term profits as opposed to the long-term development promised by neoliberalism. Many investors simply transfer their money around to capitalize on slight interest-rate differentials, while no true productive investment is being made (Black 60). These “non-productive investments” have caused a number of central banks, including those of Mexico, to maintain high interest rates so as to ensure investor confidence. The fact that the real interest rate has been higher than growth rate for the past two decades is a signal that the speculative investments have superceded the number of productive investments; a “signal of systemic crisis” (Li 23). When fear of a crisis arises, financiers have the ability to withdraw capital from the banks and sell off securities in the struggling country, as a result of freed exchange, triggering further collapse for that nation but saving personal wealth. This all-too common occurrence is known as “capital flight” (Scholte 119). The term “global casino” carries with it negative normative connotations as it captures the idea of profit-seeking tycoons investing and withdrawing funds as their opinions and fears change (DeMartino 17). What is intriguing about today’s global economy is that in this competitive quest, it is the acts of private investors, businesses, and a variety of other non-governmental actors that determine the course of trade, and exchange of goods and capital. Economic decisions are no longer at the behest of national governments. Indeed, since the inception of the Bretton Woods system, economic decisions have in fact been made by supranational organizations. When the system of fixed exchange rates fell along with the international system in the 1970s, currencies were then “floating,” their value determined by international supply and demand. Without the power to set exchange rates, state governments were even further pushed out of the fold, and the market was given even freer reign (Johnson 265). The Bretton Woods established the International Monetary 11 Fund (IMF) and the International Bank for Reconstruction and Development (now embodied as the World Bank). The IMF was conceived as a short-term lender, a role it still plays. The aim of the World Bank was to finance longer-term development ventures. Perhaps the main aim associated with each institution, however, was to provide a stable organization and set of rules in which to execute capital exchanges, without the instability of the past. In response to the increasingly clear, volatile nature of such a system, the International Monetary Fund was empowered first to making loans in order to right currency imbalances. Such freedom and lack of government intervention has encouraged “moral hazard.” This concept describes the practices of risky investments and loans for short-term gain, without due care that the recipient country or business could even repay. This apparently occurs because individuals believe that the International Monetary Fund will simply step in with a loan package to ensure foreign debt is repaid (Johnson 266). The theory of the IMF has been to “show up with a lot of money to restore confidence,” as well as of course supporting institutions they regard as salient and change those not in accord with IMF principles. There are some positive aspects, because as a result of the IMF, there is certainly a measure of “stability within instability.” Bankruptcy does not spread collapse from the affected national bank and the entirety of the world banking system is ultimately preserved (Scholte 119). It is quite remarkable how the doings of the IMF have ultimately kept the system intact (Delong 2). However, such unscrupulous practices of over-lending may signal the failure of neoliberalism to actually aid the Third World in needed economic development, and certainly have not bode well for their domestic economic stability, which is still considered part of the goal of a successful global economic policy. The international banking system continues on, but so do the incredible debts of already struggling new economies (Black 57). In any case, as it has typically been the role of the United States to provide primary funding for the loans and structural adjustment programs among the developing world, it should be interesting to note whether the system as it exists could continue indefinitely (Li 24). The most remarkable tenet of neoliberalism is a wholesale reaction to the Keynesian economic system in which the state government took an active role in regulating prices, interest and other market tools through taxing and spending, a combination between command and free market economies known as the “mixed economy.” Prior to the rise of neoliberalism, when the ideas of Keynes were prevalent, it was commonly understood that market interaction, particularly investments, are inexorably subject to uncertainties that will defy rational and economic calculation. This knowledge led Keynes and his followers to champion an inherent need for government regulation in order to avoid wholesale depression and ensure macroeconomic stability (Li 24). Neoliberalism cites the failure of highly interactive governments to avoid the financial crises of the 1970’s and instead, neoliberalism revamps the liberalism of Adam Smith and David Ricardo, reclaiming the “free market economy” (Kotz 15-16). As per neoliberal policy, free trade has been increasingly institutionalized. The General Agreement on Tariffs and Trade formed an awesome agreement, reducing average import tariffs to 3 percent (from over 40 percent in 1948) and created the World Trade Organization in 1995 (Scholte 104). Regional organizations such as the European Union and the North American Free Trade Agreement have further institutionalized the neoliberal free trade agenda. Between 1948 and 1994, 109 such regional organizations 12 were reported to the GATT. These regional associations further the global capitalist ideal by allowing for greater economies of scale and easy sharing of technology and innovation (Scholte 147-149). Most neoliberal thinkers assert that they firmly believe neoliberalism is an effective answer to the problems in the developing world. It rests upon the assumption that the free interaction of market forces will serve to usher in efficiency, prosperity, and democracy for all. Neoliberals who concern themselves with egalitarian concerns insist that the principles of free trade and comparative advantage serve to realize the most efficient uses of resources and thus will generate positive social outcomes for all (DeMartino 191). Neoliberal thinkers still rely on the assumption that each individual is a self-interested entrepreneur, always responsible to react to the demands and pulls of the marketplace (“Neoliberalism” 6, 10). In this way, the market is “self-regulating” (Kotz 15). This is an idyllic model, however, and just as rational choice theory has been criticized for being reductionistic and deterministic, neoliberal theory requires the availability of perfect information, matched with universal aims of all actors in the international field, a condition that is simply not achievable (Quiggan 72). Another core assumption of neoliberal theory is that through the market, each country will discover the industry or economic position for which it is best suited. The notion is that of “comparative advantage,” assuming each country will export that which they produce most efficiently and at least cost, importing those goods produced most efficiently by other nations. Differences in resources allocation are wholly natural, and thus in essence “fair” (DeMartino 195-197). Based on comparative advantage, neoliberal economists have criticized the attempts of Third World countries to industrialize, instead encouraging them to remain raw materials exporters, or cheap sources of labor for the corporations of the developed world (Handelman 273). If it were even possible, again, that this assumption that such efficiency could be rightly determined by some divine operation of the market, the Third World would still find itself in a position of inferiority, as they have entered the global economy at a different starting point than the First World. The “core,” or developed, countries possess both the capital and technology to produce cheap products that the Third World, or “peripheral,” nations lack the resources and level of industrialization to create themselves. Thus the core is able to sell their products for a high price, while the developing nations, competing against each other for foreign capital, are forced to sell their labor-intensive goods for a relatively low price. Although carried out in the name of comparative advantage, it can be said that developing countries are in the very same position of colonies under the avowed age of mercantilism. The dependence on imports, often far more costly than can be afforded than is earned by export, has meant that much wealth has simply flowed outward from the peripheral to the core countries. Raw materials must be exported at low cost, but re-imported after processing for a higher cost, a condition known as “unequal exchange.” The capital outflow has left little opportunity for these nations to invest in their own infrastructure or industrialization. (Shah “Structural Adjustment” 4, Black 59-60, “Grafting Stability onto Globalization?” 852). VI. A CRITICAL LOOK AT NEOLIBERALISM 13 Evidence for this principle lies in the fact that the gap between average GDP of the wealthiest 20 nations and the poorest 20 nations has grown from 15 times in 1960, to 30 times (“Assessing Globalization” 2). The developing countries have 75% of the world’s population, but only 20% of global GDP, 35% of world food, and produce only 10% of industrial output (“The Nature of Economic Development”). In a study of over 70 developing countries, it was found that the average income per person is actually lower than it was three decades ago (Black 54, “The Nature of Economic Development”). Real salaried earnings have decreased 60 percent since before the 1980s across indebted many Third World countries, some by more than 90 percent in relation to the raised prices of necessary goods, such as bread (Chossudovsky 42). Approximately 2.8 billion people survive on less than $2 per day (13). 1.2 billion of those actually survive on less than $1 per day, signaling the lowest level of poverty (Black 27). Interestingly, the World Bank actually eschews its poverty figures by insisting that the “poverty threshold” is that dire $1 per day, categorizing those above the bare minimum as “non poor.” This ignores the rising price of food and other necessities (with inflation after currency devaluation), leaving many above this lowest threshold still unable to meet basic needs. The World Bank statistics actually contradict the figures obtained by national surveys (“Global Poverty in the Late 20th Century” 3-5). Inequality of income is not necessarily “bad” in the neoliberal view. Nor is it the fault of the economic design itself, but instead resulting inequalities or inefficiencies in the schema of comparative advantage are the deficiencies of the state’s policies and institutions in distorting the proper market outcome (198). The design of any economic theory invariably reflects some normative definitions (DeMartino 42). Neoliberalism rests essentially on rational choice theory, that individuals are rational actors, and will act so as to best maximize their self-interest, a tenet central also to capitalist theory. Critics point to what seems a historical proof that along with capitalism has often come exploitation and expanded inequity (Scholte 97). Essentially, unequal incomes are the result of individual choice. As with the earliest ideas of liberalism, there is a general belief in the inequality of talent as the determinant for unequal outcomes, as the market is supposed to provide equal opportunity (“Neoliberalism” 2, DeMartino 123). A number of scholars unimpressed by the results of neoliberalism have branded its range of reforms as simply an extension of colonialism and mercantilism of the past. There can be no doubt that neoliberalism has spelled a wild success for the developed nations, fulfilling their interests in great measure (Scholte 35). A reason for this is undoubtedly that the developed nations wield not only the greatest amount of wealth, but also the most political, even military, power. According to Adam Smith, the oft-hailed father of liberal, and subsequent neoliberal, though, defines mercantilism as the discouragement of “exportation (and importation) of the materials of manufacture, and of the instruments of trade, in order to give our own workmen an advantage, and to enable them to undersell those of the other nations in all foreign markets.” (Shah “Criticisms” 4). An interesting article, entitled “The American Empire,” postulates that a country, the “most powerful country” in the world, could enforce a certain economic design so as to ensure the greatest benefit to the home country. Such a system would first include liberal capital mobility, the ability to freely invest in the domestic economies of other states, as well as “free trade,” except when tariffs are needed to protect some certain domestic industry from cheaper imports. Other 14 factors in this “hypothetical” system would also be the sanction of your own currency as the main monetary unit of trade, with the ability to create and manipulate said currency as desired. Imagine the odds that under neoliberalism, that very system is in place (Wade 1-2). Chalmers Johnson dubs neoliberalism a “rebirth of nineteenth-century capitalist fundamentalist theory” (259). It is asserted that many “development” projects are undertaken in the name of the poor, while in truth serving the interests of the elites of both the host and foreign countries (Black 13). Less inflammatory researchers admit that neoliberalism is based on a decidedly “US-centric” worldview (Quiggan 68). Indeed it is true that the USA, which contributes the most of any one country to the IMF, garners 18% of the Fund’s voting power. With the other G-7 nations, the USA forms almost a 50% voting block (‘Grafting Stability onto Globalisation” 860). At the very least it seems fair to say that the strongest advocates of the neoliberal agenda are those with both economic and political clout, big businesses, stockholders, and elites (Bourdieu 2). Neoliberal economists in general do not posit their theory in such negative and biased terms, but instead announce a firm belief that it is desirable to maximize the welfare of all, further believing that neoliberalism is the ideal context in which said goal will be achieved. Per capita incomes have “hardly” changed among the poorest 20 countries, though it should be noted that they indeed fell in “several.” Maximum monetary gain is considered the necessary condition in order for society to benefit, and economic progress in this view is an increase in consumption of material goods and services (Shah 3). There are two main views on this, not necessarily mutually exclusive. The first view is essentially that of capitalist theory, that wealth need be concentrated in the hands of the wealthy so as to accrue and subsequently be reinvested in the economy and infrastructure which would “trickle down” to the masses in the form of increased wages, decreased unemployment and so on. Other analysts simply conform to traditional liberal economic theory and insist that rapid economic growth, even as inequalities grow, will eventually lead the entire society to stage of bettered economic development (Corbacho and Schwartz 4). There is a World Bank study entitled “Growth is Good for the Poor,” that is much in line with the latter argument above. The study examines 92 countries over the span of four decades and that incomes rise proportionally across all sections of society. The inference therefore is that as the rich (measured as the richest 20 percent of the population) get wealthier, the poor (poorest 20 percent) are increasing their wealth at the very same percentage as are the richest. However, this article is based upon figures of per capita income, which although I was unable to find adequate sources to corroborate, I recall from my study of statistics that there is an inherent danger in using averages of data, as outliers in either direction have the potential to eschew results. In any case, the United Nations has stated that per-capita GPD is not one of the most important figures. In fact, when calculating their Human Development Index, which they find to be a more beneficial look at the actual status of a country’s people, their formula is designed to discount the role of per capita GDP (Emes and Hahn 6). The IMF policies have indeed been successful in cutting inflation, and garnering the foreign investment needed to achieve absolute economic growth. However, as aforementioned, this wealth has not been accumulated in equal distribution across the  Variable score that is unusually low or high (Fox, Willliam Social Statistics. Wadsworth/Thomson Learning: California. 2003. pg. 318.) 15 world. This prevalent inequality bodes further ill for political stability (Munck 503). Thus it is not clear such growth is under stable circumstances and thus sustainability of this growth is in question (Munck 503). Neoliberalism does not seem to provide the necessary institutions to maintain the global economic system. Domestic government is often necessary to provide the type of macroeconomic policy needed to stabilize market forces, yet government is being scaled back by neoliberal demand (Li 23-24). Thus, there is evidence of a “capacity gap,” in the government’s ability to mitigate economic pressures as well as demands of the populace (Quiggan 73). The inability of governments of the developing world to effectively solve the growing domestic discontent raises another criticism of neoliberalism as it is currently being implemented. The existence of these supranational organizations like the World Trade Organization, World Bank and IMF call in to question the sovereignty of states as a whole, especially that of developing nations who did not, and currently do not, have a hand in determining global economic policy. First, these powerless states must yield to the designs of the international marketplace in order to garner the investments critical to their continued development. After crises throughout the developing world in the 1980s as a result of high government interventionist economics, the International Monetary Fund stepped up its role to become the “lender of the last resort” which is often lauded as necessary for developing economies whose debt is typically denominated in foreign currency (Jeanne 1). Since external debt of the developing world is typically denominated in foreign currency, which the national banking institutions cannot carry enough off to pay off creditors when there is sudden capital flight (Jeanne 1), the IMF loans do seem to be urgently needed. Yet in order to receive them, it has been required of the developing world to undertake neoliberal reform embodied by “structural adjustment programs.” It seems that the “free will” of sovereign nations has definitely been constrained by the push of neoliberalism (Scholte 149). In this light, it is clear that neoliberal policies are not the intentional choices of the developed nations in charge. There are a number of facets to this argument, however. It is argued that in order to avoid the moral hazard described above, a secure domestic system must indeed be in place. Such a secure system is outlined by structural adjustment, which is supposed to provide the appropriate context to mitigate moral hazard. Despite these reforms to ensure security, the forces of the international system (rapid transactions, personal drive for capital accumulation), domestic systems simply cannot mitigate the risk of moral hazard Jeanne 1-2). Regardless on intent, which is impossible to determine, statistical data and historical information do seem to support the arguments of neoliberal critics. As far as the intended international neoliberal goal of macroeconomic stability, the financial crises of the 1990’s are impossible to ignore. There were six crises of note: Western Europe in 1992, Mexico in 1994, East Asia in 1997, Russia in 1998, Brazil in 1998, and most recently Argentina in the year 2000 (Bradford 1, Munck 501). The crises occurred as the states suddenly found themselves unable to pay off debt as denominated in foreign currency. It is a matter of debate whether or not internal faults ultimately created the seeds for crisis, but it is according to IMF research “generally accepted” that international forces did add to instability (Jeanne 1). Argentina was typically considered the best adherent to strict neoliberal policy (Munck 495). Its fall may just signal that “hell is starting to freeze over… or rather the high citadels of international economic orthodoxy 16 are starting to admit that IMF-driven neoliberalism may NOT be the golden blueprint for economic growth” (Newman 1). VII. FINDINGS: MEXICAN CASE STUDY After World War II, Mexico began its economic development program much in line with the rest of the world under the Bretton Woods system. The federal government was highly centralized, and attempted to promote the economy with industrialization developed by great federal expenditure. This development strategy was in response to the reduced purchase on the part of the developed nations of traditional Mexican goods, an occurrence that signaled a need for a long-term plan to develop. It was known as Import Substitution Industrialization and was undertaken throughout most of Latin American, as well as other parts of the developing world, based on the “impressive record” in Latin America (Handelman 274). From 1952-1970 in Mexico, ISI was implemented as “stabilizing” development, which seemed to have been effective, as the growth rate averaged 6% a year, while inflation rates remained low (“Mexican Economy and Society” 1). Industrialization was meant as a reaction to world economic crisis and aimed to decrease dependence upon the manufactured imports from the developed world. What instead became the norm was a dependence upon foreign technology and most importantly, foreign investments and loans (Handelman 275). From 1978-1982 for example, external debt as a percentage of the Mexican GDP grew to 36% by some estimates, while others estimate over 50%. In any case, the world interest rates rose, oil prices fell (one of Mexico’s major exports), and a major trading partner, the US, fell in to a recession (“Mexican Economy and Society” 2, Wong and Carranza 10). Mexico had essentially had committed itself to an unsustainable level of development (Flores-Quiroga 2). Thus in August 1982 the Mexican government was forced to announce its inability to pay required debts (“Mexican Economy and Society” 2, Wong and Carranza 10). The International Monetary Fund then undertook its first case among the Third World debt crises, and in response to the Mexican government’s former spending as financed by outside creditors, the first wave of fiscal and monetary austerity measures were implemented (“Mexico’s Move to Free Markets” 2). These measures along with a depreciation in real exchange rate certainly helped with the righting of the account balance, but more measures were needed to allow for repayment (Wong and Carranza 10). The IMF recognized a continued need for Mexico to be a part of the international economy, and strove to increase trade by imposing the very neoliberal free trade and financial liberalization measures. To further encourage foreign investment, protectionist domestic policy was changed to allow for 100% foreign ownership of publicly traded Mexican businesses as well as land, formerly heavily determined by a long history of land reform (“Mexico’s Move to Free Markets” 2-3). In order to continually stabilize the Mexican economy in light of increasing inflows of capital, it was the continued policy of the government to react with sterilization policies. These included some moderate capital controls as well as attempts to stabilize exchange rate by allowing slow appreciation to a widening crawling band 17 (Wong and Carranza 16-17). Economic growth continued at a rate of 3.0-3.5 percent each year from 1989 to 1994, which although less than during the period of high government control and expenditure, expectations were running high (Gil-Diaz 1). The inflation rate, another sign of success and stability was in fact only 7 percent in 1994, a vast reduction from the 1987’s pre-neoliberal 134 percent. This success was at the time attributed to a successful exchange rate stabilization policy as aforementioned, the “crawling peg,” which restrained the value of the peso to a nominal annual appreciation of 4.5%. In the past, an overvaluation of the peso had been the very last step in causing a balance of payments crisis (Kuttner and Samano-Palacios 1). Thus it can be seen that, without yet asking why, instability gave way to crisis, even after adhering to neoliberal reforms aimed to avert them. The other main challenges of neoliberal development are reduction of poverty and inequality. Perhaps the main area in which neoliberal economists have been criticized is in the increased inequality of wealth and income distribution since the implementation of policy changes. Mexico is no exception, since as of 1998 the country was ranked the sixth worse in terms of income distribution. A telling fact is that the greatest growth in income disparity occurred in the formative neoliberal years, 1984-1989. The top 10% of the Mexican population grew their share of the total income from 35.5% in 1984 to a high of 42.3% in 1994. More specific statistical data can be obtained when the Gini coefficients and Theil T indices are analyzed (Lopez-Acevedo and Salinas 1-3). According to a World Bank study, the Gini coefficient rose from 0.473 in 1984 to 0.519 in 1996. This is especially telling of increasing inequality within the middle of income distribution. The upper and lower ends of the distribution curve are measured more accurately by the Theil T index, which exhibited an increase from 0.411 in 1984 to 0.524 in 1996 (Lopez-Acevedo 3). An IMF study identifies the 1992 Gini coefficient of Mexico as 0.57, a striking difference to the 0.34 average of the countries of the Organization for Economic Co-operation and Development (such as the US, UK, Netherlands, Germany, France, Japan, Switzerland and a host of other high-income developed nations). Mexico did not become a member until 1994 (Corbacho and Schwartz 5). Mexico joined the General Agreement on Trade and Tariffs (GATT) in 1985, and coincidentally, wage inequality began to rise the same year and continue, as trade barriers were eliminated (Hanson and Harrison 1). In slightly clearer mathematical terms (to the layperson), inequality is exhibited by the fact that Mexico’s top 20 percent earned 16.4 times that of the bottom 20 percent, in contrast to the 6.3 percent of the OECD nations. Data for the year 2000 exhibits even greater inequality as the wealthiest 10 percent received almost 40 percent of total income, while the poorest 40 percent received only 12 percent (Corbacho and Schwartz 5). Absolute poverty has increased, and fully one fourth of the Mexican population lives at or below the poverty line. Real wages have not increased since the 1960s (Flores-Quiroga 3). Further, the buying power of the minimum wage actually fell by 40 percent from 1980 to 1987 (“State, Crisis and Capital Accumulation” 69). It is “commonly accepted” that there are a number of factors key that need be considered besides sheer economic growth. Poverty and income inequality have not been  The gini coefficient is a measure of inequality derived from the Lorenz curve and has values between zero and one. The closer the Gini coefficient is to zero, the more equally distributed is income the closer it is to one, the more unequally distributed (Corbacho and Schwartz 5) 18 successfully defeated in the simple numbers game, but instead with a focus on efficient use of labor and resources in addition to a focus on such elements as education and health. Even the World Bank article “Growth is Good for the Poor” admits that policies designed to raise incomes are necessary to combat poverty, and there must be a mix between the focus of growth as well as distribution to the poorest sectors of society (Dollar and Kraay 4). So what happened in Mexico to have led to such a dramatic increase in inequality of income and wealth? Was it something inherent in the process of globalization under neoliberalism? Or did the Mexican government simply fail to react in the appropriate manner? The question must also be asked, what was the root of instability (the 1994 financial crisis), the structure of neoliberalism itself, or something internal to Mexico, be it poor policymaking, banking failure or political uprising. It is this latter question that I will examine first. According to University of California’s Mexican Studies, “most [scholars]” impugn Mexico’s exchange rate regime and the Chiapas revolt for contributing most to 1994’s crisis (3). According to the former Vice Governor of the Bank of Mexico, Gil-Diaz, the fixed exchange rate “in hindsight… became increasingly untenable within the environment created: an ever greater fragility of the economy to a speculative attack.” At least, however, it ensured that prices were continuously stabilized, and he insists that it was in fact too-fast and over-large credit expansion as well as immediate political tensions that truly explain the onset of the 1994 crisis, as opposed to the often blamed overvaluation of the exchange rate (Gil-Diaz 7). As an immediate cause, the Chiapas revolt then had the effect of draining the government of a great deal of international reserves, and proved to be the final element which forced the cessation of exchange-rate limits and set off the free-floating currency regime (Flores-Quiroga 5). Based on this first glance, then, the neoliberals could state their claims, that macroeconomic policy within Mexico, lax banking regulations and political insurgency are at the root of the instability, independent of fault of their precious theory. This view changes however when the very roots of the Chiapas revolt are examined. The Zapatista National Liberation Army executed the revolt on New Years Eve, 1993. The cry of the revolution was, “We have nothing to lose… no land, no work, poor health, no food, no education… no independence from foreign interests.” The indigenous population of the region has been subject to a degree of poverty since colonization over 500 years ago. The greatest measure of trouble was not borne until the late 1970s and early 1980s, when traditional ways of living were uprooted by the oil boom. Able-bodied workers were needed to leave their villages and feed the industrial machine, allowing the agricultural way of life to stagnate. Further, land redistribution and agricultural subsidy programs were ended after 1982, while privatization was encouraged. Thus, few peasants had land to stay for, thus adding to the influx of workers to urban areas and exacerbating unemployment (Handelman 165). Between 1982 and 1990, due to privatization, 700,000 Mexicans were pushed into the “unemployed” category each year (“State, Crisis, and Capital Accumulation in Mexico” 70-71). When oil prices fell, many workers were no longer needed and were forced to return and attempt to revive their old ways of life. As modern technology became available, the populace of Chiapas found the allure of expensive chemical fertilizers and the possibility to capitalize on food production irresistible. This new philosophy was 19 damaging two-fold. First the environment quickly became so degraded that the local people can no longer even sustain themselves. To make matters worse, however, the dependence now on modern farming technologies continuously drains peasants of their little capital, as after structural adjustment, their purchasing power decreased by 40 percent (Rosset 1-2). From 1981-1988, the real GDP per working-age person actually decreased by an average of 3 percent per year (Kehoe 6). The Mexican economy as a whole has been doing well following neoliberal reform and promised growth has indeed occurred. Mexico currently ranks 9th highest world GDP as opposed to 15th in 1993, the GDP having grown from $403 billion to $544 billion (Beschloss 10). Since the institution of free trade through NAFTA in 1994, Mexico’s exports have tripled turning a 1993 trade deficit of $1.66 billion with the United States into a $37.1 billion surplus by 2002 (Stevenson 2). However, it seems that in Mexico laissez-faire growth did not lead to the miraculously efficient outcome it was expected to. When global forces entered the rural Chiapas, the “invisible economy” of the indigenous people, which formerly supported them at least at subsistence living, was forced to be monetarized, as in a host of cases (Black 52-53). What jobs had been created in the ISI period, disrupting traditional sustainable living, were actually lost when Mexico adopted IMF reform. What jobs were created were in the “subsistence-level industrial jobs” in the maquiladoras, which cannot continue to compete with the cheaper factories in Asia and elsewhere, especially in light of a strengthened peso following foreign investment (Stevenson 1-2). Flores-Quiroga also cites a lack of adequate social spending in education and justice, claiming that lagging human capital spells instability and harmed production. Another prerequisite for stability according to this institutional interpretation is equitable income distribution (Flores-Quiroga 12, 15). Government expenditure programs are indeed cornerstones for determining income distribution as well as who benefits from social welfare programs (Handelman 6, 8). As occurred in a host of developing nations, the IMF wished to ensure debt repayment, and thus fiscal austerity became one of the key elements of structural adjustment. This was achieved in one way by privatization. For example, 80 percent of Mexico’s state enterprises were privatized, causing approximately 400,000 people to lose their jobs. The other means was simply to cut back on government spending, and the areas in which it inevitably was reduced was in social welfare, especially minimum wage, unemployment benefits, not to mention health and education, subject to a “sharp reduction” in the mid 1980s (20). What expenditures the Mexican government did attempt were in response to greater macroeconomic stability (attempting to restructure loans, support the domestic banking system) aided the already wealthier segments of society who had had the capital necessary to even participate in market finance (Corbacho and Schwartz 16). It is important to note that there is a pronounced dichotomy between rural areas such as Chiapas and urban areas that continues to have important implications for the status of the Mexican people. Although 42 percent of the population in 1994 lived in rural areas, 81 percent of the country’s poor lived in rural areas. 79 percent of the “extremely poor” were concentrated in the Center, Center-West, South and Southeast sections of the country. The poverty in rural areas, especially among the aforementioned four sections grew markedly from 1984 to 1994. “Moderate” poverty increased from 50.5 percent of the rural population to 62.3 percent, while “extreme” poverty increased from 62% to 81% 20 (10). Government expenditure is indeed responsible for founding much of the income inequality in the wake of structural adjustment policies (Corbacho and Schwartz 4, 12). Real income fell 1982, and the value of the real minimum wage diminished by half. (Chossudovsky 5). Fortunately, according to the UN Human Development Index, health sub-index scores in Mexico, despite poverty, have increased by 20.9 percentage points since 1975. Mexico is not unique in this, however, as almost all states listed exhibited health increases. This fact can be ascribed to scientific discoveries, not the reforms of neoliberalism, which otherwise influenced a reduction of spending in areas such as healthcare (Emes and Hahn 19). Although the IMF recently and noted development scholars such as Howard Handelman have identified the need for some more domestic intervention to obviate poverty and inequity, “almost no government anywhere today dares openly to pursue a program of progressive distribution of wealth” (Scholte 141-142). The Mexican government has attempted social expenditures (those on health, education, social security, and housing), especially since the end of the 1994 crisis, but it is still in constant competition with the other peripheral states for capital (Corbacho and Schwartz 16). Thus, policy choices are limited, and free trade is increasingly criticized, certainly now after NAFTA, with the assertion that as a result Mexico has lost much of its control over its own economy (Stevenson 2). Therefore in the case of Mexico, what few government expenditures were made following structural adjustment generally benefited the already well off. For example, even subsidization of agriculture, although applied equally to all farmers, inevitably was a boon to those who held greater shares of agriculture credit and land. In 1985, the Mexican Constitution was amended to halt Mexico’s long history of land reform, and foreign and domestic investors were allowed to purchase as they would (“Social and Political Roots” 2). The rural poor (and industrial workers) are thus described as “the main losers during the adjustment period.” Thus inequality grew both between urban and rural areas as well as within urban areas (Corbacho and Schwartz 12-13). Poverty levels have a sharp correlation above all with education. Mexico’s HDI score on education actually declined from 86.3 to 83.6% from 1985 to 1990 (Emes and Hahn 29). Only 5.7 percent of those households whose head in 1994 had some post primary education, some high school education, or some tertiary education lived in extreme poverty, while 93.2 percent of households whose head had completed some primary school, no primary school, or were without formal education lived in extreme poverty in 1994. One can explain this difference further by noting of course that nearly 50 percent of those in extreme poverty were rural workers, while over 20 percent were industrial workers (Corbacho and Schwartz 10). Currently, a full 20 percent of Mexico’s workers are engaged in agriculture, though their efforts garner only 9% of the GDP (“The Nature of Economic Development” 2). There is a sizable difference among wages of educated, white-collar workers and blue-collar and rural workers. The average wages of blue-collar workers declined during the 1980’s by 14% while their white-collar counterparts enjoyed a 13.4% increase. Real minimum wage for blue-collar Mexican workers did decline throughout the 1980s, but this factor itself does not seem to explain wage inequality. What is more telling is that tariff barriers fell drastically in the realm of unskilled labor, a formerly highly protected sector of the economy (Hanson and Harrison 1-5). A cogent explanation for this 21 dichotomy is that because of the structure of the Mexican economy, that is dependence on export earnings and under heavy foreign influence, the only means by which members of the Mexican economy can become more competitive in relation to other Third World “price-taker” states, is to reduce costs. The quickest and simplest way to reduce cost, especially in light of Mexico’s corporate structure is to reduce wages and benefits (Walker and Armony 216). Despite the absolute economic growth and some diversification of the economy, “salaries are not keeping up with gains in productivity.” With maquiladora jobs increasingly lost to competitor states focus of the Mexican government has been on creating higher paying jobs (Stevenson 1). This focus only exacerbates the white-collar/urban and blue-collar/rural income rift. The World Bank report, “Does More International Trade Openness Worsen Inequality?” insists that what really determines income distribution of developing nation is the strength of domestic institutions, especially through democracy with voice given to citizens groups and unions (2, Henwood 3). There are unions in Mexico, the three major ones being the National Peasant Confederation, the Mexican Workers’ Confederation, and the Popular Sector, but it is true that these are generally headed by upper class or corrupt interests anyhow, lending some credence to the institutional argument (“State, Crisis and Capital Accumulation” 77) It is important to note that the government of Mexico, after the structural adjustments of the 1980s, is not powerful enough to operate at its own discretion to ensure security of financial institutions or provide for its citizens (Flores-Quiroga 12). The IMF supported the disassembly of the state apparatus and enforced a marked reduction in protection of social services and the economy (“Structural Adjustment” 9). Thus, the state cannot now protect against monopolization of industry, enforce contracts, effectively oversee banking as well as attempt to provide social securities and welfare improvement (Flores-Quiroga 12). Another part of fiscal austerity is the responsibility of the government to increase tax collections. In Mexico, many foreign businesses are able to avoid taxes altogether by keeping assets in other countries. Thus it is not always possible for revenue to be generated by rich foreign powers, and costs are therefore transferred to the Mexican people. It continues to be the duty of the Mexican state to keep up with foreign debt and maintain a low level of budget deficit, thus tax revenue is urgently needed. The proposed “value-added tax” is said to fall more heavily on the desperate working poor. What is truly needed is the institution of progressive taxation. In light of Mexico’s continued dependence on the influx of foreign capital, however, it seems too risky a measure to impose anything that may offend the sensibilities of the rich investors (“State, Crisis, and Capital Accumulation in Mexico 75). As described earlier, the transfer of money-capital became far more common than the transfer of capital for actual production. These free transfers of money and loans solely for short-term profit marked a lessened level of financial accountability worldwide (Quiggan 68). Once liberalized, the financial sector experienced such a rapid influx of credit supply, and “weak supervisors” found themselves “overwhelmed” (Gil-Diaz 1). Thus, less than ideal individuals were continuously allowed to borrow, and credit provided to the private sector rose 25 percent per year from 1988 to 1994. Such rates are considered indicators of bank or even system failure, in addition to an over-reliance on foreign borrowing. The subsequent increase in aggregate demand of much of the private sector hastened the instability of the current-account deficit, which rose to 5.83 percent of 22 GDP (Gil-Diaz 3). Some authors have pegged the 1994 current account deficit as high as 7.6 percent of GDP (Kuttner and Samano-Palacios 3). Either way, the statistic was indicative of a looming inability of the Mexican central bank to be able to repay debt in case of capital flight. One important aspect of the growing statistic is that much investment was simply non-productive and unprofitable for the Mexican banks, people, or economy. Eventually, it became clear that economic growth did not match real interest rates or the deficit and members of the private sector refused to purchase debt any longer (Gil-Diaz 3-4). In fact, those who had purchased assets denominated in pesos, noting a general fear of insecurity, rushed to sell their holdings for dollars. The Mexican Central Bank had depleted a great amount of its foreign reserves in attempting to stabilize the currency, which it found that it could no longer continue, nor could it repay foreign debt, especially as held in the Tesobonos, which were to be paid in US dollars (Kuttner and Samano-Palacios 6). Tesobonos had been offered to ensure the continued influx of foreign capital when government bonds were considered too tenuous to attract purchasers (“State, Crisis, and Capital Accumulation” 75). In general, the political support for dealing with financial crises is weak (Bradford 1). Reduction of government power and influence of course applied to the banking sector. This lessening of government power can perhaps explain the lack of banking reform that is so often pointed to as a main cause in the retardation of economic growth as well the inception of the 1994 crisis (Kehoe 1). As per the privatization program, formerly state-owned Mexican banks were sold off en masse in 1990-91. The banks were, seemingly logically, sold to the highest bidder (Kuttner and Samano-Palacios 3). However, a number of factors that would have ensured greater stability for Mexico were not considered. There was also little surety that a number of bankers met the “fit and proper” criteria supposedly needed to own and manage a bank (Gil-Diaz 6). For instance, although banks could not have more than 10 percent of their liabilities denominated in foreign currency (which did serve to mitigate some currency risk), individual could still borrow in foreign currency and use it to buy a bank. This led to further unscrupulous lending practices, as the bank owners would try to as quickly as possible pay off their investment (Kuttner and Samano-Palacios 3, 7). Stiglitz has noted that in many countries, politicians reacted to the call for privatization with some glee, seeing the opportunity for profit, a fact that the US government was fully aware of (Palast 1). Mexico has traditionally been a corporatist system of government, possessing a great deal of power to enact reform. The centralized nature of the government perhaps protected policymakers for some time from popular discontent, allowing them to undertake a neoliberal program far quicker than would be allowed in a stronger democratic system. Mexico’s traditionally corporatist and highly centralized government itself has important implications for the way neoliberalism shaped the country’s neoliberal development. The Institutional Revolutionary Party (PRI) controlled government at almost all levels from 1929 until as recently as 2000. Opposition parties had begun to enjoy electoral success throughout the 1990s. Solorzano won the mayoral race in Mexico City, while at the federal level the PRI lost its majority in the lower house, or Chamber of Deputies. The PRI retained its majority in the Senate, however, and continued to hold the most influence throughout much of the country. The IMF pressed Mexican leadership for neoliberal reform, which they readily accepted in 23 order to receive loans and investments, but political reform needed to cope with the economic changes was not included in the policy program (Coerver 2). Interestingly, however, those in charge of the Mexican neoliberal policy program were almost all graduates from US universities, many of whom had attended Yale or Harvard with the IMF and World Bank leaders they were working with. There was opposition for political position by those against a settlement with the IMF, but “with the IMF and US Treasury on their side, the Yale-trained fiscal conservatives prevailed.” (“Mexico’s Move to Free Markets” 3). It is a stretch to assert that this is an intentional move as noted in The American Empire. Chalmers Johnson insists that it is an oft-used strategy of the United States to garner support within a country by importing bright minds to the best US universities and returning them home to support their ascension to power (Wade 1). Whether this conspiracy theory is inaccurate is not relevant, nor is it necessary to ascertain whether political reforms were purposefully ignored by the IMF in designing restructuring policies; the important point to note is simply how this aided the quick implementation of adjustments in Mexico, as those in power were already convinced of the inevitability and necessity of neoliberal reform. Perhaps this belief led to a zeal for implementation beyond the capacity of the system to actually adjust. As aforementioned, one of the weaknesses of the Mexican government was its inability to regulate banking, as privatization and liberalization (allowing many foreign interests to purchase Mexican banks) took the power out of central government hands. Another weakness, caused by IMF fiscal austerity measures, was the inability of the Mexican government to promote social spending. One area in which the government did still exhibit a great deal of power, due to the long history of corporatism, was in the labor market. Labor unions, generally considered an important voice for workers, in Mexico have actually been long allied with PRI. Less than 20 percent of Mexico’s labor force belongs to a union. Those in charge of unions typically made concessions to the government for some slim reciprocal (often personal) benefits (MacLachlan 5). The situation is described as one in which “absentee union bosses still sign contracts behind workers’ backs” (Stevenson 2). The state’s role through structural adjustment was to mediate conflicts between the “means” (society) and the “end” (the goal of capital accumulation). Just as high interest rates, low taxes, and easy credit were maintained in order to feed Mexico’s neoliberal dependence upon foreign capital investment, political stability was a necessary condition. Unfortunately this translated to a great deal of repression, that people were unable to combat based on the still embedded corporatism of the past (“State, Crisis, and Capital Accumulation in Mexico” 66-70). Mexican voters, finally fed up with the “heightening levels of human misery” that had been imported by liberalization, made their disgust clear in 1988’s Presidential election, 50% voting for the new PRD party candidate, Cardenas. Cardenas ran on a platform of anti-IMF structural adjustments, which he blamed for the increased poverty in Mexico (Matrisciano 2). Amazingly, a number of essential computers “failed” on the night of the election, and PRI emerged as the victor at 50.4% of the vote. In any case, this bare majority was a far cry from the typical 75% approval. Vicente Fox, the candidate from the other main opposition group, PAN, finally ascended to the presidency in 2000 on a platform of decreasing repression, corruption, and poverty which is perhaps related to the lack of citizens’ voice. 24 Regardless of this bright idealism, the international structure has already institutionalized much of Mexico’s problems. Fear of losing legitimacy in the eyes of foreign capitalists precludes true progressive reform (“State, Crisis, and Capital Accumulation in Mexico” 71-77). NAFTA is accused of allowing the US to exploit cheap Mexican labor without regard for the purchasing powers of its workers, thus benefiting their multinational corporation. Fox, much as he may wish to, even were he pressured by more effective labor unions, cannot raise the minimum wage as Mexico has been integrated into the world economy as a competitive state for provision of labor. More Wage depression has been the manner in which such competitiveness has been continually assured, and there are no easy answers as to how (or if) this can be changed by Mexican domestic policy. Increased democracy in Mexico can actually be said to have worsened the design of effective policy, as strong competing interests cannot be reconciled to formulate labor law (“Labor Relations in Mexico: Impeding Democratic Development?” 2). VIII. CONCLUSIONS AND FURTHER THOUGHTS Neoliberalism in Mexico as implemented by the IMF’s structural adjustment programs, privatization, and trade liberalization (institutionalized by NAFTA) did not bring about the idyllic results proposed. Of course those in charge do not consider this a failure if it is true that the global economy is consciously designed to their benefit (Johnson). In any case both those who see globalization as a means of reaping unfair mercantilist benefit as well as those who believe that neoliberalism is truly the proper context in which to achieve maximum socio-economic welfare for all levels of society base their view on the assumption that economic growth is going to continue. I will return to the original spirit of first the Bretton Woods system and its neoliberal reform in examining the “success” of policy implemented in Mexico following the 1982 financial crisis. This initial spirit declared an economic system for the benefit of every person, championing the free market as the end all to the best and most efficient allocation of resources. The initial spirit promised incredible growth, substantial reductions in poverty and inequality, followed by a rising standard of living. What has been seen is a better income and lifestyle for a smaller percentage of the world’s population, while the majority suffers even more than in past decades. Additional case studies in Africa, Asia, and Latin America can be found in Michel Chossdovsky’s book, The Globalization of Poverty. In the terms defined, the neoliberal program in Mexico was not a success. The IMF Working paper by Gladys Lopez-Acevedo and Angel Salinas indicated an increase in inequity of income (as per the gini coefficient), especially during the period from 1984 to 1989 when neoliberal reform took place. Another IMF study, by Ana Corbacho and Gerd Schwartz describes income inequality by percentages, reflecting the continued inequality among Mexicans even up to the present day. Aldo Flores-Quiroga writes that absolute poverty, not merely inequality, has also increased. Explanations for this rise in poverty can be found when one examines the sharp rise in unemployment following privatization. The share of real GDP per working-age person fell, and purchasing power eroded for those who did retain jobs, as real minimum wage and its absolute value declined from 1981-1988 (again, formative neoliberal years) (Kehoe 6, Rosset 1-2, 25 Chossudovsky 5). Exacerbating this reduction of wealth, fiscal austerity forced a sharp drop, during the same time period, in federal spending on education, social security, and unemployment benefits, especially in rural areas (Corbacho and Schwartz 16, 20). If neoliberal policy was to work, it appears that at the very least, it need be implemented slowly, taking into consideration the various social and political contexts of the nation at hand. In Mexico, reform was taken above and beyond what would ordinarily have been allowed, and this imprudence was exemplified as banks were yet unreformed to the necessary degree to be able to handle the inherent volatility of a global marketplace. However, the wealthy both within the country and without often face the attempt to control change with political pressure, as exhibited by the repression of groups such as labor unions as well as by the violent suppression of militant reactionaries as in Chiapas. The Mexican government has been in constant fear of a withdrawal of needed monetary support, and they have thus been forced to allow for the liberalized, unrestrained market that most benefits the elite (“Criticisms of Current Forms of Free Trade” 15, “State, Crisis and Capital Accumulation in Mexico” 71). Slow implementation, as opposed to the rapid change allowed by the corporatist structure might possibly be able to mitigate the lure of moral hazard and disallow the dreaded capital flight that has plagued the developing world, particularly Mexico. The type of “sterilized intervention” combined with capital controls characterized by Mexico and its developing counterparts, should be recognized as only a temporary macroeconomic solution. As evidenced by the numerous balance of payments crises of the 1990s, the need for policy change is evinced (Wong and Carranza 18-19). In Mexico, despite the best efforts the government to maintain stability, they were fraught with the balance of payments crisis of 1994. The ability of foreign investors to own Mexican banks, buy and sell securities and obtain credit with ease led to an economy of a highly speculative nature (Gil-Diaz, Kuttner and Samano-Palacios). However, this was the system demanded by liberalization and privatization: rapid transactions unhindered by government regulation, and an outright dependency of Mexico on the continuation of this influx of foreign capital in order to further stimulate the beloved economic growth of neoliberalism. Even if we admit that neoliberals may be right, and that growth is indeed be good for the poor, “are IMF and World Bank policies good for growth?” (“Criticisms of Current Forms of Free Trade” 14). Research is beginning to caution, that inequity and low human development levels may serve to stifle further economic growth (Corbacho and Schwartz, Handelman). Certainly the mere fact that so many have raised doubts and concerns about the effectiveness of the neoliberal prescriptions and their effects on human life (increasing poverty, less education) somewhat signals the truth of my conclusion, that alternatives do indeed need to be found. In Mexico, the government has reversed much of the fiscal austerity measures and increased total social expenditure by 83% over the past decade. Spending on education has resumed after a sharp reduction in the 1980s, and the Mexican government has identified it has a central value to continued economic growth (Corbacho and Schwartz 18, 20). Another interesting dilemma would be to examine whether the World Bank and IMF, and more importantly, those who control it, will be willing to recognize the need for change if true development is to occur in the Third World. Globalization and liberalization should not be viewed in themselves as dubious, but instead as part of an 26 agenda that benefits the powers that be disproportionally. The all-encompassing push of neoliberalism ignores possible benefits to the developing nations that mild protectionism of import substitution strategies may have instead aiding the developed nations themselves (Rodrik 3, 8). One problem has been that neoliberal theorists have insisted that “there is no alternative” to their precious economic theory, but current experience in Brazil’s Porte Alegre experiment with a “participative budget” provides evidence otherwise (Munck 505). Robert Krol of the Cato Institute advocates a complete cessation programs, insisting they actually hinder long-term development and cause crisis-causing moral hazard. Instead he goes further than even the IMF and advocates complete action of the private market (Krol 9-10). Other scholars who provide alternative solutions concur with Krol’s call for rule of law, tax reform, protection of property, and better standards of accounting, though many would disagree with the over-reliance again on the perfect operation of the market. Anup Shah’s article “Criticisms of Current Forms of Free Trade,” cites an article describing the fact that those currently developed countries in charge of the IMF did not themselves develop under wholly free trade, but instead engaged in some protectionism, as they continue to do in certain industries (10). Further, as Third World countries are as yet structurally dependent on foreign investment, it is probably not feasible for a fair free market to emerge. Perhaps “democratic” or “cooperative” markets are possible with a mixture of laissez-faire and regulation (“Criticisms of Current Forms of Free Trade” 24). Handelman perhaps explains it best as he writes a subsection on “Finding the Right Mix.” Neither neoliberalism or the state intervention of the 1970’s were effective answers to economic growth, growth with equity, or economic stability. The “minimalist” state as currently encouraged by the IMF does not prove able to address the problems addressed throughout this paper, however the alternative authoritarianism at times encouraged inefficiency and “crony capitalism” (290). In conclusion, there is most certainly an alternative to neoliberalism, but I will not make the mistakes of neoliberal colleagues and claim to have deduced an answer. 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