Structural Adjustment in Mexico

STRUCTURAL ADJUSTMENT IN MEXICO:

The Root of the Crisis

by Carlos Heredia and Mary Purcell
Equipo PUEBLO

The economic and social crisis gripping Mexico today began some thirteen years ago when the Mexican government, confronted with a massive foreign debt, implemented a set of structural adjustment measures promoted by the World Bank and the International Monetary Fund. Those policies, intended to control inflation and generate foreign exchange to help pay off the debt, resulted in increased unemployment, poverty and economic polarization. By steadily tearing away at Mexico's economic and social fabric -- and particularly at the well-being of its small rural and urban producers -- they set the stage for the economic collapse of December 1994.

Even then, the Clinton Administration, the IMF and the Mexican government refused to address the failure of the economic model. To the contrary, they designed a US$51 billion bailout package that, by further entrenching the very policies that caused the collapse, has plunged the country into an economic depression.

The further tightening of credit, suppression of wages, cuts in social spending, and liberalization of trade and financial markets have intensified the decline of local productive capacity, deteriorated the welfare of the vast majority of Mexicans, and increased the country's dependence on foreign capital, imports and markets. Social and political tensions, manifested most dramatically in the Chiapas crisis, threaten to tear the country apart as its economy founders.

Since the onset of the crisis in December, the Mexican stock market has fallen 35 percent and the peso has lost half its value vis-a-vis the dollar. Annual inflation will reach nearly 50 percent this year. With consumer interest rates at 80 percent, businesses and individuals are finding it impossible to pay back loans, and major banks are going under. Nearly two million workers have lost their jobs as factories and other businesses fail or severely cut back production. Sales of basic goods in supermarkets are down by 25 percent, construction has fallen by 35 percent, department store sales have dropped by 40 percent and sales of new cars are down 67 percent.

The Crippling Effects of Structural Adjustment in Mexico

From 1982 right up to the economy's collapse in late 1994, the Mexican government implemented virtually all of the adjustment policies promoted by the World Bank and the IMF: reductions in public expenditures (including social services); elimination and/or targeting of subsidies; tax reform; restriction of credit; privatization of most state enterprises; trade liberalization; devaluation; removal of barriers to foreign investment; and "competitive" wages. Privatization and deregulation contributed to a steep concentration of income and wealth, a trend that ran counter to the imperative of creating a strong domestic market as a factor in ensuring sustained economic growth. In what analysts term a "trickle up" process, there was, in Mexico, a massive transfer of resources from the salaried population to owners of capital, and from public control to a few private hands.

Health and Nutrition. One of the first adjustment policies implemented was a drastic cut in public spending. In general, adjustment suggests the cutting of "non-productive", or primarily social, spending so as not to affect output or revenues. Thus, during the decade of the eighties, the health budget as a percentage of overall public spending fell from 4.7 percent to 2.7 percent. The World Bank acknowledged in a 1990 staff appraisal report that the Mexican government "...may be under- spending on health care," but because of the need to control public spending the Bank argued that it was necessary to look for alternative sources of financing, "...including the possibility of privatizing health sector activities such as curative services." The poor who rely on these services are hardest hit by such cuts, since they cannot afford private alternatives. One result was that between 1980 and 1992 infant deaths due to nutritional deficiencies almost tripled to rates higher than those in the seventies. In September 1995, the Salvador Zubiran National Institute on Nutrition reported that 80 children under the age of one die each day in Mexico due to malnutrition. With 30,000 such deaths each year, Mexico is near the bottom of UNICEF~s rating of countries~ efforts to address malnutrition. The only countries with a greater rate of infant mortality are at war.

Squeezing Small Producers. Meanwhile, trade-liberalization and restrictive-credit policies were undermining many domestic small industries and agricultural producers who were unprepared for the dropping of trade barriers and unable to compete with cheap imports. Many of them went out of business or turned into retailers for U.S. manufacturers. This situation has been exacerbated as interest rates have skyrocketed in 1995 and priority access to the limited credit that is available is given to producers with export potential. This credit structure has reinforced monopolies in the Mexican economy and is now devastating micro, small and medium-sized businesses, more than a third of which have not survived the current crisis. Sixty percent of these smaller enterprises, which historically employ 80 percent of the country's labor force, have laid off workers in 1995. Even before the peso crash and the bailout program, those who could get credit faced extremely high real interest rates, maintained in an effort to attract foreign investment and prevent capital flight.

Unemployment. Mexico had been cited by the World Bank as a successful example of a country where adjustment has included a real wage reduction in order to prevent massive unemployment. However, in a 1991 study, the Labor Congress (CT) indicated that, out of an economically active population of 34 million, 15 percent were openly unemployed, and over 40 percent -- some 14 million people -- were underemployed. According to the United Nations' Economic Commission for Latin America and the Caribbean (ECLAC), Mexico is the rare case in which the economy is marked by an inverse relationship between investment and employment. While the former has increased by nine percent from 1992 to 1994, the creation of new jobs went down. Furthermore, every day since January 1995 an average of 7,933 people have lost their jobs. The government only measures urban unemployment, while the problem is thought to be greatest in rural areas. But even by government figures, unemployment has risen by 106 percent since the start of the Zedillo administration in December 1994.

Declining Wages. Mexico witnessed a steep and continual decline in real wages during the eighties alongside massive layoffs and high levels of unemployment. By mid-1994, the minimum wage in Mexico was the equivalent of US$4.42 per day. According to a study by researchers at the Faculty of Economics of the National Autonomous University of Mexico (UNAM), from the initiation of the government's Pact with business and labor in December 1987 until May 1994, the minimum wage had increased by 136 percent, while the cost of the Basket of Basic Goods had grown by 371 percent. Official government figures show the minimum wage lost 53 percent of its purchasing power between 1982 and 1988, another 28 percent from 1988 to 1994, and an additional 13 percent during only the first four months of 1995.

Growing Poverty. The World Bank estimates that the number of Mexicans living in poverty grew by an average of 660,000 during each of the past fifteen years. The United Nations Population Fund says that the number living in poverty is growing by 1.2 million annually. According to a 1992 study commissioned by the government's primary anti-poverty agency, Pronasol, about one half of all Mexicans lived in poverty in 1990 (42 million) and 18 million lived in conditions of extreme poverty. The study goes on to say that "... if the poverty figures are frightening, their consequences should be even more frightening... Malnutrition has become the normal condition of society..." A recent study by the newspaper El Financiero revealed that the intensified adjustment program of 1995 had caused the ranks of those classified as "extremely poor" to swell by 2.193 million by August of this year.

Skewed Income Distribution. Over the past decade, the already large gap between the rich and the poor in Mexico has widened. The richest 20 per cent of the population received 54.2 per cent of national income in 1992, against 48.4 per cent in 1984. The income of the poorest 20 per cent fell from five per cent in 1984 to 4.3 per cent of national income in 1992. To illustrate the extreme concentration of wealth and income, the wealthiest Mexican, Carlos Slim, the owner of Telefonos de Mexico, is said by Forbes magazine (18 July 1994) to be worth 6.6 billion dollars. At the other extreme, about 20 percent of the population -- 17 million people in extreme poverty -- subsist on incomes of less than $350 per person per year. In other words, the assets of the richest man in Mexico total more than the annual income of the poorest 17 million people combined. Slim is not an isolated case: during the Salinas Administration the number of billionaires in Mexico rose from two to 24.

These effects of structural adjustment have been felt in urban and rural areas throughout Mexico. The plight of peasants and food producers in Chihuahua and of women in the San Miguel Teotongo slums of Mexico City are but two of the many examples of how profoundly these economic policies have affected the lives of Mexicans at the community level.

Structural Adjustment in Rural Mexico: The Case of Chihuahua

Bordering on the United States, Chihuahua is one of Mexico's largest states, with a population estimated in 1990 to be 2,441,873. Its rain-fed agriculture is dedicated primarily to the cultivation of corn and beans, two staples of the Mexican diet. Peasants generally grow these crops for their own consumption and to supply the urban population in the city of Chihuahua.

Although adjustment has proceeded more slowly in the agricultural sector than in other areas, by 1992 the Salinas administration had utilized a variety of adjustment policies to transform the agricultural sector into a more efficient producer for the international economy. Mexico received an Agricultural Sector Loan (ME-2918) from the World Bank in 1988 that guided agricultural reforms for two-and-a-half years. The overall objectives of the program were to:

1. remove global food subsidies and target remaining food subsidies to the poor;
2. reduce government intervention in agricultural markets, in part by moving from guaranteed prices for grains (corn and beans excluded) toward market-determined pricing;
3. abolish export controls and quantitative restrictions on key products;
4. reduce the role of agricultural parastatals;
5. liberalize agricultural trade;
6. cut the subsidization of inputs;
7. increase the efficiency of public investment in agriculture in real terms; and
8. decentralize and cut staff of the agriculture ministry.

In addition, other sectoral loans making up part of the adjustment "package" directly affected Chihuahuan corn and bean producers. For example, the Bank, through a financial-sector loan, sought to reduce subsidized credit from development banks; a trade liberalization loan was linked to a reduction in tariffs on agricultural imports; and a fertilizer sector loan required the internationalization of fertilizer prices. Together, these loans have led to a comprehensive restructuring of the agricultural sector.

The loan programs have reduced credit to small grain producers, eliminated farm-input subsidies, reduced or eliminated guaranteed prices, and further liberalized trade. Their effect has been to stimulate the large-scale production of export crops and reduce support for the production of basic foods, with import-tariff reductions resulting in a surge of cheap imported basic grains with which the farmers cannot compete. While increasing the cost of farm inputs, they have at the same time decreased the price of basic grains.

Faced with such drastic cuts in credit, the peasants of Chihuahua have been forced to seek various forms of supplemental financing. This may entail the selling off of livestock, though, more commonly, family members are forced to work in the cities, in the maquila industries, for large landholders, or in the United States, creating more financial problems on the farms because of the loss of free family labor. In fact it is becoming more and more difficult to find a family that does not have at least one relative working in the United States and sending money home. The situation of Martha Hernandez de Gonzalez is typical:

My husband is always here during planting season, but the rest of the year he spends working in the United States. He and four children in Texas, Florida, Colorado and New Mexico take care of all the family expenses and they take turns helping with the planting. When we are short of money, my husband and my children are contracted to work in the apple orchards or to do some other work in the countryside.

The adjustment policies have thus resulted in decreased peasant production and productivity and a further concentration of land ownership. A vicious cycle of decapitalization, low productivity, decline in incomes, deterioration of living standards, and migration is repeating itself. The overall quality of life in the state has deteriorated.

It is clear to many that the government is attempting to slowly force small farmers out of corn and bean production. However, no practical alternative has been offered. Officials at the World Bank recommend that these producers move on to more productive activities or to crops "like strawberries". Aside from the fact that strawberries cannot be competitively produced on these lands, such a transition would require financing, training, and technical and marketing assistance, and very little government support is available in any of these areas. Without comprehensive programs to assist in the restructuring of economic activity, current economic policy will only lead to increased poverty and migration to the cities.

The Impact of Adjustment on the Urban Poor: The Case of San Miguel Teotongo

As opportunities have diminished in the countryside, Mexicans have increasingly moved to the cities in search of a better life. Although poverty is most severe in rural areas of Mexico (due largely to decades of an urban bias in public policy), it is broadly believed that the urban poor have been hit hardest by the adjustment process. They constitute the group that relies most heavily on wage employment, consumer subsidies and public services -- all of which have declined under adjustment.

The community of San Miguel Teotongo is located in the Iztapalapa district on the eastern outskirts of Mexico City. Iztapalapa is the largest and one of the poorest districts of the metropolitan area. San Miguel was settled in 1972 by poor families that left the center of the city because of high rents and overcrowding. Since then, San Miguel has grown rapidly to a population of close to 80,000 today.

Three sets of adjustment policies have had the greatest impact on the residents of San Miguel Teotongo: the reduction of real wages and reduced public investment; cuts in subsidies and the liberalization of prices; and cuts in public services. The effects of these policies include: a reduction in real income and purchasing power; an increase in the importance of the informal economy and family labor; an increase in the relative price of many basic goods and services; and a reduction in the quality of public services while their costs increase.

Declining real wages and job opportunities are the most serious problems faced by families in San Miguel Teotongo. A central feature of the government's stabilization and adjustment program has been the reduction of real wages, while declining investment, the growing privatization of the economy, and public- sector cutbacks (all part of adjustment) have led to fewer employment opportunities. In general, families in San Miguel are working harder and longer for less income today than 12 years ago.

Nationally, decreases in wages have occurred at all salary levels, but losses have been greatest among the lowest wage earners. Considering the 67 percent loss in purchasing power of the minimum wage between 1982 and 1991, workers should be making three times the minimum wage just to stay even. With only 5.7 percent of the workers surveyed in San Miguel in 1993 earning more than twice the minimum wage, it is clear that there has been a substantial decline in overall family and community purchasing power. According to national poverty indicators, 67.9 percent of the population of San Miguel Teotongo lives in poverty.

The decline in real wages has been accompanied by an increase in prices. Studies show that the prices of basic foods have risen even faster than those of many other consumer goods. Since food is the primary expense of poor households in San Miguel, the latter are severely affected by such price rises. Increases in food prices are the result of the reduction or removal of subsidies and the liberalization of the basic-foods market. Both of these policies were mandated under adjustment. The "canasta basica" (the basket of basic goods deemed necessary for a family of five) cost 46 percent of the minimum wage in 1983, 81 percent of the minimum wage in 1988, and 61 percent more than the minimum wage in 1992. Today, the same "canasta basica" costs four times the minimum wage.

The trends in education in San Miguel reflect what is happening nationally. Most children complete primary school, but increasing numbers of secondary-school-aged children are dropping out. One of the stated goals of SAPs regarding education is the transfer of government resources from higher education to primary education. However, between 1982 and 1990, the education budget fell from 5.5 percent of GDP to 2.5 percent. As public spending declined, the cost of books and materials increased. As a result, the cost of sending children to school is often prohibitive for poor families, and economic crises frequently force even young children to work. The impact has been felt by many in San Miguel, including Gloria Bautista:

I have six children. My two oldest dropped out of secondary school after the first year. We couldn't afford to buy the books and they got bored. Now they help with family expenses by doing odd jobs in the street... It's a problem because they aren't old enough to work legally, so they are paid almost nothing...

In 1970 the Mexican government adopted the goal of providing health care to the country's entire population by the year 2000. Adjustment, however, caused sharp reductions in overall health- care spending during the eighties. Subsequent spending increases have been significant, but they still have not compensated for the earlier cuts. In theory, all Mexicans are covered by some type of health care program. In practice, however, very poor or non-existent service, exacerbated by budget cuts in the 1980s, has meant that many poor Mexicans do not have access to adequate health care through public institutions. They either go to private physicians or they do not go at all. This is the case in San Miguel, which, like so many other communities, is lacking in health centers.

Today in San Miguel, families must work harder and longer hours to make less money and to purchase more costly goods and services. Items such as books and health care are cut out of their budgets under these circumstances. Food consumption is cut back and consumption patterns change, with a variety of nutritional foods being replaced with less expensive, and often less nutritional, foods.

Conclusion

The economic collapse of December 1994 generated headlines around the world, but the problems associated with the economic course chosen by Mexico were apparent well before then. While the World Bank and the IMF were applauding Mexico's economic performance under adjustment, one half of the population was living in poverty and their ranks were swelling daily.

The removal of government from most areas of economic planning left the future development of the country principally in the hands of the market. This change has helped generate even greater profits for a relative few, but it has not addressed structural problems blocking long-term participatory and sustainable development. The case of Mexico is a clear lesson that success in the achievement of some macroeconomic indicators of "success" does not necessarily translate into the improved social well-being of the population. The pursuit of economic efficiency and short-term profits overrode concerns about greater equity, leading to an increased economic polarization of society.

Even before the current crisis, structural adjustment in Mexico had resulted in:

1. high unemployment and underemployment;
2. a worsening of the already steep concentration of wealth and income;
3. a deteriorating physical and social infrastructure;
4. a continued disequilibrium in the trade balance and in the current account of the balance of payments;
5. a greater dependence of the economy on external financing; and
6. the absence of an authentic political consensus around the consolidation of adjustment policies.

The distribution of the costs of adjustment was very unequal. The Salinas government deliberately chose to compress salaries, with the supposed purpose of maintaining the competitiveness of Mexican exports. This policy led to the over- exploitation and a deterioration in the quality of the labor force. Furthermore, even with extremely low real wages, unemployment and underemployment remain high.

The net effect of the adjustment program on the population groups that are the focus of this study is extremely negative. Not only has adjustment not contributed to laying the groundwork for an improvement in their standard of living, but it has threatened their very livelihood. Small farmers in Chihuahua have seen the prices of their products go down while the prices of their inputs have increased substantially. The residents of San Miguel have seen prices rise much faster than wages, while social services decline in quantity and quality. Many have been cut out of subsidy programs and forced to supplement family income in any way possible.

What has been lacking throughout the adjustment process in Mexico is a social and economic policy that truly puts people first. Needed in particular is an income-generation policy that more fully incorporates the poor into the national economy. Nevertheless, both the Mexican government and the IFIs continue to support an economic program that has more to do with bailing out commercial banks and foreign investors than with addressing the people's needs.

Mexico is one of many cases worldwide where adjustment and the free market have not only failed to alleviate poverty, but have further polarized the country and led to disaster, economic and social. World Bank and IMF officials continued to say -- right up to the current crisis -- that adjustment's attack on poverty would take time, but, after more than a dozen years of adjustment in Mexico, things have never been worse than they are today, and there is no light at the end of the tunnel. There must be a point at which these institutions acknowledge that their strategy has failed and needs to be abandoned, and that a new, more democratically determined approach to the country's development has to be taken.

Sources include: Aguilar, Ruben, and Roelfien Haak, Informe de la Mision Evaluadora: Projecto de Autodesarrollo Integral de San Miguel Teotongo, June 1993, p. 14; Bautista, Gloria, interview in San Miguel Teotongo, March 1993; Corbo, Vittorio and Stanley Fisher, Adjustment Lending Revisited: Policies to Restore Growth, The World Bank, 1992, p. 11; Crevoshay, Fay, "Perjudica a Mexico la tendencia a la concentracion del ingreso: BID," La Jornada, 22 April 1994; El Financiero, 12 October 1992, p. 12; Forbes, 18 July 1994; Fraser, Damian, "The poor make their presence felt," The Financial Times, 17 February 1994; Garcia, Fernando, "Mexico en la OCDE: mas desempleados al club de los ricos", El Financiero, 30 April 1994; Gutierrez, Elvia, "En punto critico el empleo manufacturero," El Financiero, 27 April 1994; Hernandez de Gonzalez, Martha, interview in Ranchos de Santiago, Municipality of Guerrero, March 1993; La Jornada, 6 September 1992, p. 1; Lysy, Frank, interview at The World Bank, Washington, 23 February 1993; Oswald, Ursula, Estrategias de Supervivencia en la Ciudad de Mexico, Universidad Nacional Autonoma de Mexico, Cuernavaca, 1991, p. 108; and Becerril, Andrea, 1992, p. 4; Ramirez, Carlos, "Archivo Politico", El Financiero, 22 May 1994, p. 29; Salinas de Gortari, Cuarto Informe de Gobierno, Instituto Nacional de Estadistica, Geografia, e Informatica, 1992, p. 401; The World Bank, "Mexico: Agricultural Sector Adjustment Loan (2918-ME): Project Completion Report," 10 November 1992, p. ii and 11; The World Bank, "Mexico: Basic Health Care Project: Staff Appraisal Report," November 8, 1990, p. 45.