Chapter Six—
Mexico's Foreign Debt Crisis:
Bank Hegemony, Crisis, and the State

Lending institutions . . . have tended to move from a confident, expansive view of this lending [to developing countries], to a very cautious view in recent months. And there is some danger that an abrupt contraction in this lending would precipitate the very kind of [global and domestic financial] crisis that we want to avoid. . . . International lending does play an important role in the world economy. You just don't want to shut it off abruptly.
—Paul Volcker, former chairman of the Federal Reserve Board

This chapter will examine international finance capital relations, particularly those revealed in Mexico's 1982 foreign debt crisis. I will analyze Mexico's history of mounting debt, U.S. congressional participation in the resolution of the crisis, and the effect of this participation on Mexico's domestic relations. Finally, I will discuss the significance of these developments for the relative efficacy of theories of the state.

Developing and developed countries have increasingly relied on debt financing to support development and to close balance-of-payments gaps. These capital needs have previously been met through aid and loans from multilateral and bilateral official

sources (such as the International Monetary Fund, the World Bank, and the International Bank for Reconstruction and Development). But the international capital market has undergone a structural transformation.^[1] Prior to World War II private banks were the predominant source of capital in developing countries; after the war until the mid-1960s developing countries continued to rely on external capital, but the predominant source was direct investment and official bilateral and multilateral aid. Official development aid (ODA) from the international Development Assistance Committee has been declining since the late 1960s: "ODA was 0.44 per cent of [developing countries'] . . . gross domestic product in 1965 and barely 0.3 per cent in 1977" (Dhonte 1979, 6). Private financial institutions have increasingly filled the void created by declining official aid. The debt developing countries owed to private creditors increased by more than 200 percent between 1972 and 1975, whereas their liabilities to official creditors increased by only 60 percent. "The share of official commitments in total lending, which was 55 to 60 per cent until 1972, dropped to 46 per cent in 1975" (Dhonte 1979, 7). Meanwhile, between 1970 and 1976 private debt as a component of total foreign debt in developing countries nearly quadrupled (Lichtensztejn and Quijano 1982, 264).

One indicator of the enhanced participation of private financial institutions in peripheral countries' development is the striking pattern of growth of debt servicing. Debt service burdens for official loans increased by 58 percent between 1972 and 1975, whereas the burden of private loans in that period increased by 87 percent and that for loans from private financial markets increased by 125 percent (Dhonte 1979, 7; see also OECD 1984a; Seiber 1982; Stallings 1982). Thus developing countries owe an increasing proportion of their debt to private banks. Private debt as a share of poor countries' debt grew from 2 percent in 1971 to 6 percent in 1980; for middle-income countries that proportion increased from 14 to 30 percent, and for newly industrialized coun-

tries, from 38 to 65 percent (Wood 1986, 256). Most important, the proportion of new loans going to service old debt rose from 37 percent between 1970 and 1976 to 88 percent in 1980 (Wood 1986, 269). Consequently increasing proportions of developing countries' gross national product service debts to private banks.

One of the important stimuli for this structural transformation was the fuel disruptions of the early 1970s. The cost of petroleum quadrupled during that time, exacerbating the balance-of-trade problems of non-OPEC developing countries. At the same time OPEC countries enjoyed tremendous profits from the sudden radical increase in petroleum prices. They deposited those petrodollars in core financial institutions. With demand for credit stagnant in the developed countries, banks invested the windfall in the form of loans to developing countries (Seiber 1982; Stallings 1982). Trade dependency in developing countries added to the significance of petrodollars. Trade dependency distorts the structure of the economies of developing countries by forcing overconcentration in the production of particular commodities and a reliance on imported goods for other necessities. The balance-of-payments problems created by the soaring cost of petroleum forced developing countries to rely increasingly on loans to bridge the gap, thus contributing to finance capital dependency (Seiber 1982; Stallings 1982).

Similarly, dependence on transnational corporations forced many developing countries to develop expensive infrastructures. Transnational corporations required the construction of roads, sewers, electric systems, railroads, and airports as prerequisites for locating in peripheral countries. Host countries assumed the cost of this construction, which they financed with loans. Later those countries sought loans to escape from the negative effects of dependence on transnational corporations (Wood 1986).

Fuel disruption, petrodollars, and dependent development were neither the only nor the most important causes of developing countries' increased reliance on private loans. In fact, private banks' largest investment increases in developing countries occurred earlier, in the late 1960s and early 1970s (OECD 1984a; Moffitt 1983). Among other reasons, the return on corporate loans fell sharply during this period, causing banks to search aggressively for new loan customers (Moffitt 1983, 93–97).

Developing countries came to rely on loans from private banks for several reasons. Global inflation and the declining value of the dollar during this period meant that real interest rates were negative (Wood 1986, 243). More important, private bank loans offered developing countries an avenue of "escape from the discipline of the aid regime" of official agencies such as the International Monetary Fund and the International Bank for Reconstruction and Development (Wood 1986, 245). Official aid was generally earmarked for specific projects with strict conditions. Projects funded by official agencies had to be oriented toward attracting private industry. Recipient countries could not use the funds for social welfare expenditures or state-owned or -controlled enterprises. By contrast, Euromarket loans carried few specific conditions (except those affecting repayment and default) and were not tied to particular projects. As long as the loans were repaid (or at least serviced), banks did not care what they were used for. Private banks' continued reliance on the IMF to impose conditions and policy changes on developing countries can be traced to their embarrassing failure at such efforts in Peru in 1976–1977 (Wood 1986; Stallings 1979).

Private bank loans hence enabled developing countries to avoid official agencies' "strategic withholding" of aid. Strategic withholding from particular sectors or projects empowered official aid agencies to influence the development policies of recipient countries (Payer 1974). In particular, official agencies routinely withheld aid from state-owned industries, while more readily funding projects for private industrial development. Developing countries could use commercial loans to maintain and expand state-sponsored industrial development (Wood 1986). Finally, private banks' lack of concern about policies and the use of loans enabled developing countries to expand social welfare expenditures despite mounting fiscal deficits (Reynolds 1978). As a rule, private bank loans enhanced the state's relative autonomy in determining policies, relations with constituents, and the direction of development. Mexico's experience was no exception.

The borrowing market of developing countries offers a fairly attractive investment opportunity to private banks because they receive large commissions from loan placements and interest pay-

ments (Gonzalez 1985; U.S. Congress, Senate 1982, 343–345). The ten largest U.S. banks make almost half their total profits from foreign investments (Moffitt 1983, 51). Indeed, Lichtensztejn and Quijano (1982, 203) point out that "international loan operations carry considerable weight in the total profits made by banks. . . . The international gains of the thirteen principal United States banks amounted to 34.2 per cent of total profits in 1973 and 47.7 per cent in 1975, and it is estimated that roughly 75 per cent of the profits of United States banks in 1976 came from their foreign operations."

In addition to the structural transformation in the capital markets for developing countries, there has been increasing concentration in both the lending organizations and the recipient countries: two-thirds of private bank loans are concentrated in five countries and three-fourths in ten countries (Dhonte 1979; Lichtensztejn and Quijano 1982; OECD 1984a; Marsden and Roe 1984; Sanchez Arnau 1982; Stallings 1982).^[2] Moreover, in 1975 only six banks provided almost 40 percent of developing countries' debt from private international banks (Dale and Mattione 1983; Lichtensztejn and Quijano 1982).^[3]

Meanwhile the trend in international capital markets has moved toward lending consortia, for several reasons:

1. The capital requirements of most developing countries are so high that no single bank could reasonably (or legally) cover them. Lending consortia give banks access to this desirable and profitable business.

2. Lending consortia spread the risks.

3. Such syndicated arrangements enhance the profitability of loans,

since consortia charge higher commission fees than individual banks for administration and participation.

Lending consortia thus represent power for the private banking community because they structurally organize and unify the control of capital flows: "Risk-sharing . . . becomes a source of strength [for the private banking community], since a joint commitment by banks in different countries presents a solid front to discourage the outbreak of disputes with debtor States" (Lichtensztejn and Quijano 1982, 205).

These developments have formed a structurally hegemonic international banking community whose collective control of capital flows can constrain the relative autonomy of nation-states. The concentration of international capital flows in fewer and fewer banks and the enormous size of states' lending consortia also give the banking community the potential to socially construct international economic reality.

Shocks to the international financial system in recent years could have caused the system to collapse. Mexico, Argentina, and Brazil were the most significant on a long list of developing countries in danger of defaulting on foreign loans by 1982. Peru has threatened to limit its debt repayments to 10 percent of its exports (Wall Street Journal , 31 July 1985, 1). In Africa, where the export earnings for many poor countries are negligible or negative, increasing debt service burdens are creating what Brooke (1987, 11) calls a "financial famine." Meanwhile, persistent inflation and recession continue to erode the balance of payments of developing countries, further aggravating their debt positions. Yet despite the great threat of collapse in the international monetary and financial system, the banking community has weathered the storm and continues to thrive.^[4]

Developing countries have not fared so well. Many have suf-

fered contracting economies, high unemployment, stratospheric inflation rates, devalued currency, and mounting debt. What processes and relations produced the foreign debt crisis? How did the banking community overcome grave difficulties to socially construct international economic reality? What is the basis of the relative autonomy of the state in the world political economy, and how does the control of capital flows affect that autonomy?

To address these questions, I will focus on Mexico's massive foreign debt crisis, which had great significance for the banking community.

Setting the Stage

Mexico's foreign debt difficulties owe much to its previous trade dependency and consequent mass dissatisfaction in the 1960s. Mexicans began to question Mexico's "miracle" of economic growth—averaging 6 percent annually for thirty years with limited inflation—after a violent clash in 1968 between students and the army (New York Times , 29 Aug. 1982, E3; Barkin and Esteva 1986; Cockcroft 1983). Protesters criticized Mexico's approach to growth and development, which heightened the already unequal distribution of land and wealth (Reynolds 1978; Kraft 1984; Barkin 1986). Increases in productive capacity during the 1940s and 1950s had stimulated growth and price stability in the 1960s, but productivity gains in agriculture and manufacturing continued to increase underemployment. High underemployment meant decreased state revenues. At the same time, the industrialization of the 1940s and 1950s had encouraged urbanization and population growth, which increased the demands on state capital expenditures. Mexican officials feared that changes in fiscal and exchange rate policies would cause an exodus of private investors that would destroy the Mexican miracle (Reynolds 1978).

In addition, Mexico continued to support and subsidize national industries that competed with multinational firms—an increasingly expensive policy (Davis 1986). Mexican leaders therefore chose to finance the country's deficit with long-term loans. From 1965 to 1970 loans increased at an annual rate of 34 percent, while foreign direct investment increased only 5.5 percent. Interest payments since 1965 have increased fourfold, with debt

servicing growing from 35 to 95 percent of new loans (Reynolds 1978, 1007–1008; see also Davis 1986).

The state addressed the popular criticism and reduced the left's radical appeal by becoming more directly engaged in rectifying these imbalances. President Luis Echeverría Alvarez established social, educational, health, housing, and rural development programs (see Dramatis Personae 5). He stimulated new job creation

by supporting tourism and by subsidizing the steel, auto, and chemical industries. These measures pushed the annual growth rate in 1971 and 1972 to 7 percent. But private-sector opposition within the ruling party (Partido Revolucionario Institucional, or PRI) quashed the initial plan to pay for these programs through increased taxation of the private sector. Subsequently inflation, which had kept pace with U.S. inflation, began to rise faster, increasing 12 percent in 1973, 24 percent in 1974, and 15 percent in 1975. Simultaneously the world recession eroded the foreign markets for Mexican exports, seriously damaging Mexico's balance of payments (U.S. Congress, Joint Session 1984; Senate 1983a, 32). By 1976 Mexico had devalued the peso for the first time in decades, from 12.5 to 20 pesos per dollar (Kraft 1984, 33; New York Times , 1 Sept. 1976, 49). Devaluation "almost doubl[ed] the real foreign debt (to almost $50 billion)" (Cockcroft 1983, 259).

Echeverría's solution was a stabilization program with the IMF. This plan touched off a great deal of controversy within the government. When Echeverría's term ended in 1976, PRI replaced him with José López Portillo, whose approach to Mexico's problems depended on the country's oil industry (nationalized since 1938). The quadrupling of oil prices in 1973 meant that Mexico's oil could salvage the country from disaster. Indeed, Mexico freed itself from the IMF's program by 1979 primarily through its $4 bil-

lion in crude oil exports, which produced a growth boom between 1978 and 1981 (New York Times , 12 Sept. 1982, F1; U.S. Congress, House 1983b; U.S. Congress, Senate 1983a). During the boom Mexico had an annual real growth rate of 8 percent, created 500,000 new jobs a year, and had an annual investment rate of 20 percent. Oil became critical to the Mexican economy: 75 percent of Mexico's export earnings derived from petroleum (Cockcroft 1983; Hamilton 1986b; New York Times , 12 Sept. 1982, F1). Meanwhile, from 1976 to 1980 Mexico tripled its reliance on imported capital goods to 80 percent (Cockcroft 1983). In addition the green revolution of the 1960s generated increasing inequality, focused agricultural activity on export processing, and reduced Mexico's ability to meet its own basic food requirements. By 1980 Mexico had to import "half of all its basic grain needs" (Barkin and Esteva 1986, 134).

Mexico's rapid growth also produced problems: "The combination of too much money chasing too few goods achieved its usual result—inflation, up from 15 to 35% in 1980" (Kraft 1984, 34; see also Taylor 1984, 148). The rate jumped to over 100 percent in 1982 (New York Times , 21 Aug. 1982, 32; 12 Sept. 1982, F1). In 1981 the global oil glut undermined the price of crude oil. Jorge Díaz Serrano (president of Pemex, Mexico's national oil company) attempted to lower the price of Mexican premium crude from $30 to $28 per barrel to stay competitive with other oil producers. Díaz Serrano was overruled by strong opposition from both the radicals, who disliked the oil boom because it enriched the wealthy at the expense of the poor, and the orthodox economists, who disliked the resulting inflation. After his resignation, the price of Mexican crude oil returned to $30 per barrel, with exactly the consequences Díaz Serrano expected. Major customers in the United States, France, and Japan canceled their orders, causing Mexico's oil exports to plunge from 1.5 million barrels per day to 1.1 million. The damage was significant:

By the time the price was restored in September, Mexico had lost at least a billion dollars in projected revenues. Holders of pesos, alert to the trouble ahead, stepped up their conversion to dollars or their purchase of foreign goods. The net loss in foreign exchange was some $5 billion for the year. That constituted a substantial fraction of the payments deficit during the year—$13 billion. (Kraft 1984, 35)

The need to close that enormous balance-of-payments deficit helped push Mexico into debt in the foreign capital market (U.S. Congress, House 1982, 1983a; Joint Session 1984).

Riding the Debt Spiral

Like other developing countries, Mexico became indebted to the private banking community because of its attempts to escape the restrictions of official aid agencies and because of the structural transformation of the capital market (Wood 1986). Both the private and public sectors in Mexico relied heavily on foreign loans to finance the phenomenal growth of the 1970s, because during this period the Mexican economy turned toward import substitution manufacturing of consumer goods instead of the previous industrial production, which depended on capital goods importation. Ironically, the rapid expansion of Mexico's petroleum industry aggravated the dependence on foreign loans because Mexico had to import the technology required for that industry's development. While export earnings soared from $6 billion in 1977 to $19 billion in 1981 (75 percent of which derived from petroleum), imports nearly quadrupled from $6 billion to $23 billion (Hamilton 1986b, 154–155). Earnings from petroleum exports were wiped out by the cost of the imported goods required to support the growth of the oil industry, producing a balance-of-trade gap.

Getting into debt came quickly and easily for Mexico. Pemex borrowed $10 billion in 1981. (Its previous total debt was $5 billion.) Mexico's total debt increased in 1981 from $55 billion to $80 billion (New York Times , 17 Aug. 1982, D17). It owed almost $34 billion (60 percent) to U.S. banks, which shortened the maturities on this debt (U.S. Congress, House 1982, 6–7; Joint Session 1984, 46; see also New York Times , 21 Aug. 1982, 32; 31 Aug. 1982, D1). In the first half of 1981 only 5 percent of Mexico's debt was due within one year. That proportion climbed dramatically to 22 percent by the end of that year. The majority of the new loans were due in six months (U.S. Congress, Joint Session 1984; Kraft 1984, 35).

López Portillo refused to cut government expenditures or raise new taxes despite Mexico's quickly deteriorating situation (New York Times , 9 Sept. 1982, D19). Instead Mexico devalued the

peso several times, further eroding its balance of payments (U.S. Congress, Joint Session 1984; Barkin and Esteva 1986; Hamilton 1986b).

In addition, because of internal political struggles Mexico's leaders often made contradictory decisions. For example, only days after announcing a devaluation in March 1982, the government allowed a wage increase that reduced the benefits of the devaluation. Austerity measures that were supposed to accompany the devaluation (including decreases in public spending, increased interest rates, and more price increases to discourage food and oil overconsumption) never materialized. The capital markets responded by raising the interest rate on Mexico's $100 million Eurodollar loan to 18.5 percent (Kraft 1984, 37; see also New York Times, 19 May 1982, D8; 25 May 1982, D1).

Although high inflation and interest rates and repeated currency devaluations seriously hurt Mexican industrialists, Mexican bankers benefited from the situation (Hamilton 1986b). Mexico's economic expansion of the 1970s included a significant transformation in its banking community. The number of banks fell from 243 in 1976 to 63 in 1981 as a result of a streamlining program by Finance Secretary David Ibarra Munoz in which many small banks were combined into large ones. At the same time Munoz urged Mexican banks to join major Western banks in lending consortia, thereby increasing their access to international financial resources. The resulting concentration of resources was dramatic: "By 1982, 65 percent of [Mexican] banking assets and 75 percent of profits were concentrated in the three largest banks" (Hamilton 1986b, 155). This concentration and access to foreign capital resources benefited the Mexican banks during the continued devaluations because they earned high interest rates on assets and earned profits from dollar investments ouside Mexico. But Mexican industrialists, who had no access to international financial resources, suffered from the devaluations of the peso and high interest rates on their outstanding debts (Hamilton 1986b).

Further devaluations of the peso and increases in imports produced a flight from the peso. Some foreign banks whose loans were maturing refused to renew them (U.S. Congress, House 1983a; Kraft 1984, 37; New York Times , 17 Aug. 1982, D1). Mexico's new finance minister, Jesus Silva Herzog, instituted a se-

ries of emergency measures that failed to ease the country's economic crunch. In mid-August 1982 Silva approached the U.S. government for a rescue plan.

Meanwhile López Portillo had another approach in mind. He believed that Mexico's problems derived from the massive transfer of money out of the country by the banks and the wealthy and middle classes. He wanted to plug that drain by nationalizing Mexico's banks and by using exchange controls (New York Times , 9 Sept. 1982, D19; Hamilton 1986b). The measures were supposed to produce funds that the government could invest productively. The business community and several Mexican government officials, including Finance Minister Silva, opposed the plan. Silva argued that these measures would not stop capital flight from Mexico, but rather would aggravate it by provoking a loss of confidence in the Mexican government and economy (New York Times , 3 Sept. 1982, 2).

On 31 August 1982 López Portillo sought to pacify increasingly militant workers and peasants by signing decrees that nationalized the banks and imposed exchange controls to stop the flight of pesos (Cockcroft 1983). Americans with business investments and fixed-interest dollar documents in Mexico were "angry and alarmed" at the continual devaluation of the peso, the freezing of dollar assets, and the imposition of currency exchange controls (New York Times, 24 Aug. 1982, D13). The devaluations also placed Mexican corporations in a debt crisis. Grupo Alfa, Mexico's largest private corporation, was among the hardest hit by the devaluations; it responded by suspending payment on the principal and most of the interest on $2.3 billion in foreign debt (Business Week, 23 Aug. 1982, 41; see also New York Times , 12 Sept. 1982, F1; Hamilton 1986b).

Currency controls frightened and infuriated the upper classes. Corporations, which could only meet their foreign obligations with dollars, were also angered by the uncertainty about their access to dollars and the rate at which access would be achieved. Groups such as the National Association of Exporters and Importers lodged accusations of governmental incompetence and panicky decision making (Business Week, 30 Aug. 1982, 38; Hamilton 1986b). The devaluations and currency controls also worried and antagonized U.S. corporations. John F. Beck, vice president of

North American Vehicles Overseas (a division of General Motors) warned that the devaluations would generate severe price increases that the market would not bear. Many other business leaders noted that if the Mexican government's extreme measures were not temporary, they would be considered expropriation (Business Week, 30 Aug. 1982, 38).

The U.S. government, alarmed by the implications of Mexico's debt crisis, arranged a package in August 1982 in which the United States agreed to buy $1 billion of Mexican oil for its strategic reserve at prices well below market value, and to pay in advance (Cockcroft 1983). Mexican steel and cement corporations found eager markets in Texas and other U.S. Sunbelt states that were still enjoying growth (Business Week, 13 Sept. 1982, 106).

The Mexican debt crisis and the subsequent currency controls and devaluations also affected U.S. multinational corporations and threatened corporate loans. Many firms had to reexamine their corporate priorities as profits and earnings fell and shipments were interrupted. As one reporter noted, "Many U.S. corporations have Mexican affiliates with substantial dollar debt being placed in overdraft" (Business Week, 4 Oct. 1982, 87; see also Erb 1982; New York Times, 7 Oct. 1982, D1). Most firms ceased all but the most critical shipments to Mexico, and some companies supplied their Mexican subsidiaries with just enough capital to ensure the subsidiaries' survival. When non-Mexican suppliers to the subsidiaries nervously demanded that the U.S. parent company guarantee payment in advance, most of these corporations refused. The suppliers, meanwhile, risked losing their market shares by refusing to make unguaranteed shipments to long-standing customers. One banker summed up the corporate dilemma: "If you want to continue to do business down there, you have to do it on open account and risk not getting paid" (Business Week, 4 Oct. 1982, 87). Interestingly, the banks were unwilling to accept this risk and later struggled for state bailouts of their investments in Mexico (U.S. Congress, House 1983b; Senate 1983a).

The weak peso and uncontrolled inflation sent unemployment soaring in a country where underemployment already stood at 50 percent. More than a million Mexican workers lost their jobs in 1982. Half the layoffs were in construction (Cockcroft 1983; Hamilton 1986b). General Motors had laid off 1,000 of its 9,000

Mexican workers by September 1982. Severe declines in auto sales prompted massive layoffs in Mexico's steel industry (Business Week, 13 Sept. 1982, 104). The new layoffs, together with the old underemployment and inflation, seriously eroded Mexican consumer demand. Workers' purchasing power declined because of the labor unions' agreement to support López Portillo's job creation objectives by accepting more modest wage increases during Mexico's more prosperous years (Business Week, 13 Sept. 1982, 104). Antagonisms between labor and the state were already heated because López Portillo had recently increased the price of such food staples as corn, tortillas, and bread by 50 to 100 percent and of beans (Mexicans' major protein source) by 265 percent as a means of reducing the subsidy burdens of the crisis-ridden state (Business Week, 13 Sept. 1982, 104; Cockcroft 1983; Hamilton 1986b).

Although López Portillo imposed exchange controls to reduce the budget deficit, most social expenditures continued. He argued: "Government spending . . . is the most useful means for achieving the redistribution of income. . . . There has been no squandering of resources. Every program has its own justification" (Kraft 1984, 38–39). These measures made the banking community extremely nervous, and some banks began to take action. They inundated Mexican branch banks in New York with demands for over $70 million in repayments and deposits. At the close of business on 7 September 1982, two major U.S. banks (Chemical and Manufacturers Hanover) found themselves $70 million short, a situation that, left uncorrected, jeopardized the entire clearinghouse system of the banking community (Kraft 1984, 40–41). Paul Volcker, chairman of the Federal Reserve Board, arranged to deposit $70 million into the two banks' accounts from money the Bank for International Settlements (BIS) had advanced to Mexico (New York Times, 31 Aug. 1982, D5). But he emphasized that this was merely a temporary solution, since any demand for Mexico to pay all its $6 billion in obligations would absorb all the money advanced by BIS, the United States, and the IMF. An advisory committee told Mexican officials not to pay the demands in full yet.

At this point negotiations between the IMF, Mexico, the United States, and the banking community began to develop an austerity program for Mexico. A great deal of struggling between Mexican

officials and Jacques de Larosière, managing director of the IMF, ensued in the negotiations. De Larosière rejected López Portillo's approach, insisting instead that Mexico develop policies to cut government expenditures and hold down wages (U.S. Congress, House 1983a; Joint Session 1984). Mexican officials Carlos Tello (director of the central bank) and Fidel Velazquez (head of Mexico's unions) opposed the IMF's standard austerity program. They advocated an administrative retrenchment program involving "a preset and generally overvalued exchange rate, exchange controls, and import licensing." Mexican leaders viewed this alternative approach as Mexican nationalism, facilitating a reduction in "trade and financial dependence on the U.S." (Business Week, 22 Nov. 1982, 55; see also New York Times, 9 Sept. 1982, D19). Volcker, Mexico's advisory committee, and Silva all supported the IMF's position.

These struggles and the mounting pressures prior to the August crisis had a political impact. López Portillo and PRI selected Miguel de la Madrid Hurtado to succeed as president. De la Madrid shifted Mexico's economic policy away from the populist alternative toward compliance with the IMF's austerity program. In his inauguration speech de la Madrid announced his plan to reduce the country's deficit, a plan that included a tax increase, cutbacks in public works programs, and the elimination of subsidies on domestic consumer products such as tortillas and gasoline. Indeed, the next day de la Madrid "doubled the cost of gasoline—twice the increase anticipated by most Mexicans" (Business Week, 13 Dec. 1982, 55). Whereas López Portillo firmly resisted the IMF in his last days as president, de la Madrid committed Mexico

to cut the budget deficit drastically—from an estimated 16.5% of gross national product in 1981 to 8.5% in 1983. Foreign borrowing was to be reduced by three-quarters—from $20 billion in 1981 to $5 billion in 1983. Inflation was to be cut from roughly 100% in 1982 to 55% in 1983. Subsidies, imports and wage hikes were to be lowered accordingly, and taxes raised. Inevitably growth would be negative for a long time to come. (Kraft 1984, 46; see also New York Times, 11 Nov. 1982, A1; Taylor 1984, 147–150)

Silva hoped to use the agreement to raise the banking community's confidence in Mexico. Mexican officials wanted the banks

to extend the ninety-day moratorium on payment of principal, granted in late August, for another ninety days (Kraft 1984, 46; see also New York Times, 17 Nov. 1982, D9). But the banks refused to agree to the extension unless Mexico satisfied two conditions. First, the banks wanted Mexico to maintain its interbank deposits to ensure that other foreign banks would not gain access to Mexico's finances at the expense of the major banks. If Mexico did not comply, the major banks threatened to declare the country in default. Second, the banking community wanted Mexico to address the debt in the private sector. The currency exchange controls imposed by the Mexican government made it impossible for Mexican firms (including those with healthy balance sheets) to find the dollars necessary to pay off or service their debts. The banks wanted the Mexican government to rectify this situation, which threatened to force the banks to reclassify the loans for nonpayment of interest—a move that would have negative consequences for the banks (Kraft 1984, 47; New York Times, 15 Dec. 1982, D2). The banks also wanted Mexico to guarantee the private sector's debt (Wood 1986). Although Mexico basically agreed to establish a mechanism to satisfy these conditions, it hinged on the Mexican central bank's ability to accumulate dollars and on the approval of the U.S. Federal Reserve.

Despite those misgivings the U.S. banking community generally applauded de la Madrid's program to shift the Mexican economy toward a free-market orientation. His approach transferred the blame for Mexico's economic woes from greedy bankers and exploitative industrialized countries to "the Mexicans themselves" (Business Week, 13 Dec. 1982, 27; see also Cockcroft 1983). In line with this position, he reinstated Miguel Mancera as head of the central bank and retained Jesus Silva Herzog as finance minister. Both men opposed López Portillo's program of exchange controls and bank nationalization (Business Week, 13 Dec. 1982, 27; Hamilton 1986b). Members of the Mexican labor movement and leftists in the ruling party were not among de la Madrid's appointees. The pattern of appointments silenced labor and alternative populist viewpoints in favor of the approach preferred by the IMF and the banking and business communities. Willard D. Andres, president of the Latin American division of the U.S.-based Becton Dickinson and Co., noted, "Business supports this guy, and busi-

ness is prepared to wait to get some of the fruits" (Business Week , 13 Dec. 1982, 28). Business interests had a strong ally in the new state administration, which would work on their behalf in negotiations with the IMF and the banking community. The wait was worthwhile for the business community. De la Madrid denationalized 33 percent of the banking industry in 1983 by selling shares in Mexican banks to the private sector (Business Week , 10 Jan. 1984, 40; Hamilton 1986b). He also sold shares in "nonessential" firms held by the nationalized banks (New York Times , 22 May 1984, D8; Hamilton 1986b).

The Struggle Intensifies

While Mexican officials struggled with the banking community over the specifics of Mexico's rescue, de Larosière of the IMF had bigger goals in mind: he wanted to develop a model to preserve the international financial system. At a meeting he called with top executives of the banks on Mexico's advisory committee, de Larosière "presented an analysis of Mexico's financial requirements for 1983." They included $1.5 billion for reserves, $2.55 billion to repay loans from BIS and the U.S. Federal Reserve, and a deficit of $4.25 billion, for a total of $8.3 billion (Kraft 1984, 48; see also New York Times , 23 Dec. 1982, D12; 24 Dec. 1982, D4). According to de Larosière, the IMF was ready to extend $1.3 billion. He believed the United States and other foreign governments could offer $2 billion. The remaining $5 billion, he told the banks, would have to come from them. To underscore his position, de Larosière informed the banks that he would not recommend that the IMF accept Mexico's program of adjustment without new money from them (Kraft 1984, 48).

The IMF and de Larosière received some support for this approach from Volcker, who implied that the Federal Reserve would not strictly apply regulatory rules against banks that made additional loans to Mexico. Fearing the collapse of the banking community without the support of the IMF, the banks accepted the second ninety-day postponement of Mexico's debt payments. After wrangling over how to raise the $5 billion, the U.S. banking community reached a settlement with the IMF and the European banking community. Under the U.S. banks' prevailing solution, all the

participating banks were assessed an additional 7 percent over their existing exposure to Mexico (termed the "7 percent solution", see Kraft 1984, 50).^[5] The U.S. banks thus structurally unified the international banking community in relation to Mexico.

De la Madrid instituted a series of measures for Mexico's recovery, including the easing of exchange controls, an increase in interest rates, and an arrangement whereby Mexico's private sector could gain access to dollars to make interest payments on their loans. Negotiations had concluded by early December 1982. The new $5 billion loan would be repaid over six years, with a grace period of three years and a fee of 2 1/8 percent over the U.S. prime rate, plus a 1 1/4 percent up-front negotiating fee to the banks. The agreement also extended the 180-day moratorium on the repayment of $20 billion to the close of 1984; repayment would be made over eight years, with a four-year grace period, at an interest rate of 1 3/4 percent over the U.S. prime rate and an up-front negotiating fee of 1 percent to the banks (Kraft 1984, 51; see also New York Times , 16 Dec. 1982, D8; 17 Dec. 1982, D6). Mexico had stepped back from the brink of bankruptcy—at least temporarily.

The Scorecard

We can evaluate the relative power of each of the participants in Mexico's rescue by comparing the benefits received and the concessions made. The Mexican government was able to negotiate for time. It avoided default but agreed to an additional annual interest payment of $150 million for eight years. Mexico also accepted an IMF-imposed austerity program that has a history of undermining economic recovery and development (Girvan 1980; Debt Crisis Network 1985).

In exchange for extending the moratorium on Mexico's debt and providing new loans, the banks received profitable rates: "They raised by half a point the average they were receiving on the rescheduled debt. They got for the new money a half-point more in interest than they had received for the last big commercial loan to Mexico" (Kraft 1984, 51). Although half-point increases may not

sound like a great deal, the enormous principal produces millions of dollars. Furthermore, the up-front negotiation fee of 1 1/4 percent translates into $200 million at no risk. One banker noted that most of the up-front renegotiation fee is pure profit for the banks, because "the administrative costs associated with renegotiating the loans were 'not near' the amount of the fee" (New York Times , 10 Jan. 1983, D1). The Federal Reserve conceded that up-front fees may be part of the cause of debt crises in developing countries, because they provide an additional incentive to banks to "seek out international loans in order to boost earnings immediately, and, once this has occurred, to sustain past earnings levels" (U.S. Congress, House 1983c, 134).

In addition, the U.S. banking community reasserted itself as the international heavyweight champion by winning the struggle with European banks over the so-called 7 percent solution. The final agreement with Mexico "set a precedent for similarly advantageous terms with Brazil, Argentina, and other troubled countries" (Kraft 1984, 52; New York Times , 25 Feb. 1983, D1). Above all, instead of absorbing massive losses, the banks increased their earnings under the agreement. One Federal Reserve official noted that Citibank's earnings increased by $8 million. As Angel Gurria, Mexico's public credit director, noted: "The banks did fabulously well on the deal. They played the good Samaritan and did their best business. They made 70 to 90% on their capital. Restructuring turned out to be good business for them" (Kraft 1984, 52). Indeed, several banks reported that they could earn a profit of more than $300 million in fees for renegotiating the loans of Mexico, Argentina, Brazil, and Costa Rica alone (New York Times , 10 Jan. 1983, D1).

In congressional hearings on U.S. legislation to bail out the banks' investments in Mexico, Volcker indicated that the federal government may have helped precipitate Mexico's crisis. He admitted that the interest rates on Mexico's debt were sometimes as high as 20 percent and that the peak interest rate coincided with Mexico's crisis. Yet Volcker insisted that although "there was no question that when world interest rates went up that added greatly to their [Mexico's] balance of payments problem and helped precipitate their difficulty," the Mexicans would not have been affected by the interest rates "if they [hadn't had] the debts in the first place" (U.S. Congress, House 1983a, 135–136). Volcker's

analysis ignores the banks' pressure on Mexico to borrow, federal pressure on U.S. banks to continue to lend to Mexico, and the role of the Federal Reserve in raising interest rates. His refusal to acknowledge the banks' and the United States' responsibility in creating the debt crisis in Mexico infuriated many congressional leaders, who noted the hypocrisy of bailing out the banking industry when the Reagan administration was heavily promoting laissez-faire in the business community.

Disciplining the International Banking Community

Parts of the international banking community were displeased with the U.S. banks' domination of the agreement with Mexico. In particular, Japanese and European banks were angry that previous loans to Mexico served as the baseline in computing the value of the 7 percent solution. Japanese banks argued that they had never made any direct loans to Mexico, but had simply "acquired promissory notes from U.S. banks" (Kraft 1984, 52). Swiss banks claimed that Mexico's baseline numbers included the sale of bonds (which were specifically excluded from the rescue agreement).

Regional and local banks in the United States were equally contentious. They were not as heavily exposed to Mexico as were the major commercial banks. The small banks resented being forced, in effect, to bail out the large banks (Kraft 1984, 52). Regional and local banks were particularly unhappy that the large money center banks made the policy decisions and agreements that all banks had to abide by: "We never participated in jumbo loans to the Mexican government. So we didn't feel we should pay for the mistakes of the money center banks. Just because they decided to put up an additional 7 per cent was no reason for us to do it. 'Who decided what and why?' was the question I kept raising," complained one regional banker (Kraft 1984, 53). But the large U.S. banks had state help to enforce those decisions. When one Florida bank balked at the 7 percent solution, the Federal Reserve got involved. The head of the recalcitrant bank explained:

We made trouble for the big banks on the theory that they might let us out of all the loans just to get us out of their hair. At one point we even made noises about a law suit against some of the Mexican banks. That turned out to be unwise. The threats came to the attention of the Federal

Reserve Board. The Fed is our main regulator, and in fact we need approval for a merger. The bank examiners came around and started asking questions. That was enough for us. We dropped the suit. (Kraft 1984, 53)

The large U.S. banks achieved unity in the international banking community despite the resistance of Japanese and European banks and small regional U.S. banks, which claimed that the so-called 7 percent solution placed an inequitable burden on them to support what was essentially a rescue plan for the large U.S. banks. The mechanism that compelled opponents to comply with the large U.S. banks' solution was the structure of lending consortia. More than 1,600 banks had jointly provided loans to Mexico (U.S. Congress, House 1982, 52). A refusal by the major U.S. banks to renegotiate those loans would have meant a significant loss to all and bankruptcy for some. The sheer size of the large U.S. banks put them in a stronger position than the small banks to flirt with the possibility of a Mexican default without suffering bankruptcy. Their size all but guaranteed the large banks a federal bailout, since the U.S. government has always feared the economic and political repercussions of bankruptcies among major banks.

Although each bank's exposure to Mexico would in theory determine its ability to absorb Mexico's bankruptcy, past congressional action indicated that the size of the bank would be the more important factor. Furthermore, participating in lending consortia is the only way small banks can get access to the lucrative corporate and national lending business. They had to comply with the 7 percent solution or forfeit participation in future lending consortia of all sorts.

The forces of discipline in the international banking community were formidable. In the United States the major commercial banks applied pressure on the regional banks, and the regionals pressured the local banks. Mexico's advisory board (composed predominately of bank representatives) invoked whatever forms of pressure it considered appropriate: "Sometimes we [the board] brought pressure from state or Federal regulators; sometimes from figures in the local community; sometimes from other bankers" (Kraft 1984, 53). Apparently the major banks had little difficulty getting state institutions to apply pressure on their behalf.

Internationally, the U.S. Treasury unofficially pressured the Japanese, French, and Swiss governments to "make their banks see rea-

son on the basic finacing formula." British and French bankers visited the Middle East to convince Kuwaiti and Saudi Arabian bankers to cooperate. De Larosière himself promoted the agreement to Italian bankers (Kraft 1984, 53). Finally, the comptroller of the currency in the United States sent a letter to Mexico's advisory board reaffirming Volcker's earlier promise that the Federal Reserve would ease regulations for all banks participating in the loan agreement, as stipulated by the IMF. After much arm-twisting, the major banks successfully disciplined the rest of the banking community into a hegemonic front. The rescue operation was well on its way. What the banks now needed was state support in developing a mechanism to bail out their investments. That effort quickly found a voice in congressional hearings on increased quotas for U.S. participation in the IMF and on new facilities at the Export-Import Bank for Mexico (and Brazil, which had similar problems).

Bailing Out the Banks

Two major proposals before Congress addressed the debt crisis facing developing countries. Heated controversy attended the hearings on the increase in U.S. financial support for the IMF and on new facilities for the Export-Import Bank. Many government and banking industry representatives who testified at the IMF hearings called the proposed increase a form of jobs bill for the United States—the same argument they had used during Chrysler's bailout hearings (see U.S. Congress, House 1983a, 1983c; Senate, 1983b).

Volcker insisted that if the United States did not resolve the debt problems of developing countries (particularly of those most important to the United States, such as Mexico), "the prospects for growth in the industrialized world and then in the developing world and in the U.S. would be impaired. We would jeopardize our jobs and our exports and financial markets if this situation is not managed" (U.S. Congress, House 1983a, 10). Volcker reminded Congress that approximately 5.1 million U.S. jobs in 1980 were export related (U.S. Congress, House 1983c, 7). Mexico, the third largest importer of U.S. goods and services, is a key market for U.S. exports. The foreign debt crisis (and the imposed austerity program) had a profound effect on Mexico's imports; in 1983 imports fell 60 percent below 1982 levels and nearly 70 percent below

1981 levels. The United States suffered a $6.2 billion drop in exports to Mexico in 1982 and another $3 billion drop in 1983; "almost 85% of that decline occurred in the manufacturing sector, and that total translates to almost a quarter of a million lost jobs for American workers" (U.S. Congress, House 1983b, 44; see also House 1983c, 38; Senate 1983b).

Volcker repeatedly denied that the increased quotas to the IMF were designed to bail out the banks, but he could not categorically deny that the increases would benefit them. Indeed, Volcker acknowledged the pivotal role of the banking community in international and national affairs by asserting that the financial stability of the nation and of the world system depended on the health and stability of the banks (U.S. Congress, House 1983a, 14, 15).

Bankers did not deny the benefits to them of the proposed increases and at times were blunt about their power to inflict a world crisis unless they received help from the state. William S. Ogden, vice chairman of Chase Manhattan Bank, N.A., noted, "With one out of five U.S. jobs export-related, and with over one-third of U.S. exports going to LDCs ["less developed countries"], it is an inescapable fact that this country's well-being is vitally affected by the debt problem and by our ability and willingness to solve it" (U.S. Congress, House 1983a, 183; emphasis added).

Many opposed increasing quotas to bail out the banks' investments. Congressman Stewart B. McKinney criticized Volcker for equating increased support of the IMF with an insurance policy against the collapse of the international financial system. McKinney was annoyed that the banks had avoided both accountability and concessions while learning on the IMF as their insurance policy. He argued that banks do not worry when borrowers can't repay their loans, because they assume that "Uncle Sam is going to come across and take care of them" (U.S. Congress, House 1983a, 99; see also Gonzalez 1985, 65). Congressman Fernand J. St. Germain echoed McKinney's anger and frustration: "You and I both know if push comes to shove . . . the Fed will come riding to the rescue. The chariots will be thundering down the streets of Manhattan" (U.S. Congress, House 1983a, 131). Congressional opponents throughout the hearings reiterated that any increased quotas to the IMF represented a bailout of the banks and warned that taxpayers would ultimately pay for defaults incurred by developing countries. Since the banks had made the loans without consulting the

taxpayers or sharing their profits with them, congressional leaders did not think that the public should have to share in the losses.

Moreover, some doubted that increased quotas to the IMF would in fact solve the crisis. On the contrary, such increases might have deleterious effects on the United States. Congressman Charles Schumer pointed out that the austerity measures the IMF imposed had potentially negative effects on the United States, since they had a history of depressing imports and retarding gross national product growth. Schumer cited a Morgan Guaranty estimate that "the kind of austerity settlements being imposed would decrease the growth of our own . . . GNP by a full percentage point which is quite significant" (U.S. Congress, House 1983a, 115). Schumer termed the austerity settlements "self-defeating." Without denying the charge, Volcker objected to Schumer's antagonism to the up-front fees the banks charged for renegotiating debts, but he would not respond directly to reports that the fees were higher than necessary. It seemed that Volcker and the banks refused to entertain alternative solutions that were not in the banking community's interest.

Despite the opposition, anger, and frustration expressed at these congressional hearings about forcing U.S. taxpayers to bail out the banks, the state did not cross the banks. The proposal for a 47 percent increase in quotas to the IMF passed (Kraft 1984, 55).

Similar debates and struggles ensued when Congress considered a proposal to establish a special $2 billion facility at the Export-Import Bank (Eximbank) for Mexico and Brazil (see U.S. Congress, House 1983b; Senate 1983a). The Eximbank is a key factor in U.S. exports, providing assistance to foreign countries to purchase U.S. goods and thereby giving the United States a stronger position than other exporters in the world market. The Eximbank was originally created in 1945 to provide an institutional supplement to the private credit market and to offer credit that commercial banks were unwilling to provide because of high risks. Eximbank credit supplements were crucial to the world's recovery from World War II. The proposed new facilities were designed to help the Mexican and Brazilian governments pay for U.S. goods and services by underwriting their trade with the United States. Ultimately, proponents hoped, the new facilities would encourage private banks to "reestablish their trade finacing roles with Mexico and Brazil" (U.S. Congress, Senate 1983a, 2). Like the proposal to

increase IMF quotas, the Eximbank proposal was cast as a jobs bill. Because Mexico is the third largest export market for U.S. goods and Brazil is the ninth largest economy in the world, Eximbank support of those two countries' imports would preserve U.S. jobs. Lionel H. Olmer, under secretary for international trade, U.S. Department of Commerce, estimated that for every $1 billion of lost exports, U.S. workers lost 25,000 jobs (U.S. Congress, Senate 1983a, 77). He pointed out that the decline in Mexico's importation of U.S. goods might cost as many as 250,000 U.S. jobs (U.S. Congress, Senate 1983a, 8; see also Senate 1983a, 292–297; House 1983b, 3).

Many congressional leaders (including Senator William Proxmire) questioned the appropriateness of the proposal. Because one of the IMF-imposed austerity measures was the radical curtailment of imported goods, the enhanced facility would not help those countries import more U.S. goods and hence would not preserve any U.S. jobs at all. Furthermore, Proxmire asked, are the proposed facilities "really in keeping with the primary purpose of the Bank, which is to assist U.S. exports, or . . . will they function to assist the Governments of Mexico and Brazil to resolve their balance of payments difficulties?" (U.S. Congress, Senate 1983a, 52, 3). In noting that the IMF is the more appropriate source of credit to close balance-of-payment gaps, Proxmire identified the relation between the two proposals before Congress: both sought to bail out the banks' investments.

Marc E. Leland, assistant secretary of the Treasury for international affairs, explained the connection between the proposed guarantees for U.S. exports and debt servicing, noting that both were an integral part of the financial system as a whole:

One simply can't separate one part of this system from the rest. One cannot . . . look at debt servicing and balance of trade as . . . separate problems. Our banks and banks around the world loan these monies. They have every reasonable expectation that these countries, with proper adjustment policies, will be able to continue servicing their debt. (U.S. Congress, House 1983b, 20)

Leland's remarks suggest that austerity programs and programs from the IMF and the Eximbank (which minimize banks' risks) ensure debt servicing and profits to the banks. Indeed, William H. Draper, chairman of the Eximbank, acknowledged that if loans the

Eximbank has guaranteed go into default, U.S. taxpayers would have to pay them off. He noted that the guarantees would cover both principal and interest, and that the Eximbank could not control the interest rates demanded by the private banks. Apparently, with the support of the Eximbank—a state institution—a unified banking community that sets a high interest rate could make a great deal of money at no risk.

The struggles over the proposals to increase IMF quotas and improve the Eximbank's facilities highlight the role of the state in assuring the financial community's interests in international finance capital relations. Previous structural imbalances in developing countries' economies (produced by trade dependency and dependent development) generate balance-of-trade gaps, which lead to increased foreign debt (Delacroix and Ragin 1981). To avoid aid agencies' restrictions, many developing countries seek loans from private banks. Worldwide inflation and recession, characteristic of trough periods of long-wave cycles of economic development (Kondratieff 1979), further aggravate balance-of-trade gaps and jeopardize the ability of developing countries to repay or to service their existing debts. The Eximbank helps the structurally distorted economies of developing countries to continue to import U.S. goods and services while restoring private banks' confidence and profits by guaranteeing a risk-free investment. Similarly, the IMF provides bridge loans to close the balance-of-payments gaps and interim loans between private bank loans. Thus the Eximbank and the IMF, both international state agencies, guarantee private bank loans—mitigating the risks to banks—and actually encourage loans that are of dubious value to U.S. taxpayers but are ultimately profitable to the banks. Austerity programs and assistance programs from both institutions ensure debt servicing and huge profits to private banks. Furthermore, both the Eximbank and the IMF discipline developing countries to focus significant proportions of their gross national products on debt repayment.

No one in the debate over alternatives to the traditional IMF austerity programs raised the issue of increased taxes for the private sector, although such a plan had been proposed and quashed a decade earlier. One alternative to the austerity program might have been an IMF-imposed private-sector tax increase to raise revenues and close Mexico's budget deficit. The bailout program also failed to address the banks' excessive front-end fees for nego-

tiating and renegotiating debt, a practice acknowledged in congressional hearings to have contributed to Mexico's foreign debt crisis (U.S. Congress, House 1983c).

Why would the state and various state agencies do so much on behalf of finance capital interests? The historical process of concentrating finance capital in fewer and fewer hands, coupled with bank unity and the finance capital needs of developing countries, has placed the banking community in a pivotal position in the global economy. Congress expressed great concern during the hearings that a sharp contraction in new credit to developing countries with financial difficulties could have "a cumulatively depressive impact on the world economy" (New York Times, 31 Aug. 1982, D5; see also U.S. Congress, House 1982, 72). For example, by 1981 Mexico owed more than $80 billion to more than 1,600 banks around the world (Kraft 1984, 35; see also New York Times, 17 Aug. 1982, D1; 20 Aug. 1982, D15). If the state did not bail out the banks, the international financial system could collapse. Leland underscored this insight when he noted that the enormity of the debts of developing countries requires the involvement of governments and their agencies to aid the private banks (U.S. Congress, House 1983b, 20).

Assistant Secretary of Commerce Alfred H. Kingon inadvertently portrayed the process by which banks contribute to the difficulties of developing countries, necessitating a state-sponsored bailout of the banks' investments. He noted that banks were increasingly demanding that all loans be "fully collateralized: titles to real estate, cash deposits, or payment guarantees"—all of which further concentrate capital flows in the banking community. Kingon added that disruptions in cash flows, trade credits, and financing have "undoubtedly complicated attempts by Mexico and Brazil to adjust to their debt burdens and reorder their economies" (U.S. Congress, House 1983b, 34). Ironically, these bank-induced complications threaten the banks themselves. Because of the contradictions inherent in international finance capital relations, the state and its institutions must bail out the banks or risk jeopardizing the world economy (and with it the economy of the United States).

Ultimately, despite the often heated controversy and the critical insight into finance capital relations and processes, Congress approved the proposal to create a special $2 billion facility at the

Eximbank for Mexico and Brazil. Once again the banks appeared to compromise the relative autonomy of the state.

Outcome

The IMF forced the Mexican state into the politically unpopular position of sharply contracting the Mexican economy (see Taylor 1984; Hamilton 1986b). Indeed, there was widespread recognition of the relative weakness of the state. The New York Times (29 July 1983, A3) reported: "The administration of President Miguel de la Madrid Hurtado is not controlling its own destiny as far as economics is concerned. The country is under severe strictures from international lending organizations in return for help in paying off its foreign debt of more than $80 billion."

The banks elicited state initiatives to bail out their investments in Mexico. As we have seen, despite strong opposition the U.S. Congress passed initiatives to establish special facilities at the Export-Import Bank for Mexico and Brazil and to join the international community in increased quotas to the IMF (see U.S. Congress, House 1982, 1983a, 1983b, 1983c; Joint Session 1984; Senate 1982, 1983a, 1983b). The fear of chaos in the world economy in general, and in the U.S. economy in particular, prevailed over congressional outrage at bailing out the banks. Significantly, neither bill provided for greater controls on or accountability for the banks' lending practices. The banks' excessive up-front renegotiation fees, identified as a major factor in the overwhelming debt of developing countries, remained untouched. What occurred was a state-sponsored bailout of the banks' investments without any fundamental modifications of the lending practices that contributed to and exacerbated the international debt crisis.

With new special facilities at the Eximbank, new loans—including a $5 billion loan agreement with 530 Western banks (New York Times, 25 Feb. 1983, D1; 4 Mar. 1983, D4)—and an IMF-imposed austerity program in place, Mexico began to show signs of recovery by late 1983. The recovery was a mirage. In 1984 Mexico's debt to U.S. banks increased by almost $4 billion (a rise bankers attributed to Mexico's strict austerity program). Although Mexico's balance of trade shifted dramatically from a 1981 trade deficit of $4.5 billion to a 1982 surplus of $6.6 billion (U.S. Congress, Senate 1983a, 22), the improvement was illusory. More than

35 percent of Mexico's export income went to interest payments in 1983 (New York Times , 17 Aug. 1984, A14). The changes in the balance of trade reflected "a crippling contraction of imports" and a greatly weakened peso (Weiner 1984, F3; New York Times , 29 June 1983, D1; see also Taylor 1984, 148–150). Mexico's export level of $21 billion remained constant between 1982 and 1983, while imports shrank from $24 billion in 1981 to $14.4 billion in 1982 and about $8 billion in 1983. The cost of these drastic cuts in imports to Mexico's economic growth and domestic production was substantial:

The unavailability of foreign-sourced raw materials, machinery, and replacement parts . . . contributed to the decline in the country's output in 1983. . . . However, here is where Mexico is chasing its tail. There can be no real improvement in its manufacturing exports without an increase in the imports of raw materials and equipment essential for production, which in turn would have an immediate adverse impact on the balance of trade—thereby fogging that image of functioning austerity. (Weiner 1984, F3; see also Weiner 1983, A23; Taylor 1984, 152–153; Hamilton 1986b)

Many observers point to the decline of Mexico's inflation rate from more than 100 percent in 1982 to 75 percent in 1983 as a sign of recovery. But again the improved picture disguises the arbitrary and inconsistent measures used to gauge inflation. As Weiner (1984, F3) reported: "While the Consumer Price Index shows an 82 percent increase from December 1982 to December 1983, other estimates of inflation in 1983 exceed 100 percent. And conveniently forgotten by all concerned was the Mexican target of a 55 percent inflation ceiling for 1983." The peso took a beating, dropping by 85 percent since 1982 (Business Week , 28 May 1984, 50). The falling peso contributed to the inflation rate in 1983, which depressed real wages in Mexico by 30 percent (Business Week , 1 Oct. 1984, 75).^[6] Unemployment exceeded 8 percent, and under-employment reached nearly 40 percent (New York Times , 29 June 1983, D8). The devastating effect of the austerity program on workers deepened the problems of the Mexican economy. Still under import constraints, Mexico now devoted 40 percent of its

budget to debt servicing and imported seven million tons of food in 1983 (after a poor harvest). Consequently, "all major construction projects [were] cancelled or suspended" (New York Times , 15 Dec. 1982, D2).

Mexico's illusory recovery illustrates how IMF-imposed austerity programs may undermine the long-run prospects for real recovery. The main objective of the austerity programs is to bail out the banks, because the programs are designed to force the state to curtail imports, economic growth and development, and wages to channel a large proportion of the GNP to debt servicing and repayment.

This process recurred to a lesser extent more recently, when Mexico faced another debt crisis caused by the collapse of world oil prices. Once again the peso lost 30 percent of its value in less than one week, because the revenues anticipated from oil production fell more than $3 billion short of the interest payment due in 1986 on Mexico's debt. And again the forces of collective finance capital marshaled their willing and reluctant allies to deal with the situation. After de la Madrid threatened to limit Mexico's interest payments "to our capacity to pay," the U.S. government, the banks, and the IMF joined forces to produce a new rescue package (Business Week , 23 June 1986, 43, 42). In exchange, they pressured Mexico for fundamental economic changes, including the privatization of state-owned enterprises, trade liberalization to open Mexican markets to U.S. manufacturers, and changes in economic policy (such as state subsidies of manufacturing) to promote a more favorable climate for U.S. manufacturers (Business Week , 4 Aug. 1986, 35; 25 Aug. 1986, 51).

Whereas the Mexican government had previously nationalized the banks in response to the drain of dollars out of Mexico, the austerity program resulted in the privatization of at least 34 percent of the nationalized banks (New York Times , 29 Dec. 1982, D1). Although de la Madrid refused to accept another austerity program (since the first had failed to stimulate a recovery in 1982), the banking community's collective control of finance capital flows empowered it to limit Mexico's relative autonomy to determine domestic policy.

Although it may be tempting to view the banks' behavior as a last resort to a serious problem, that analysis is not entirely appropriate here. The banks had aggressively pursued the placement of

loans in Mexico, as they had everywhere in Latin America, demanding highly lucrative up-front renegotiation fees and applying nonconcessional interest rates. In addition, they elicited the IMF's help in forcing Mexico to accept an austerity plan that set the stage for further cash flow shortages and declines in economic development two years later. More appropriate actions would have included more prudent lending, minimal up-front renegotiation fees, and concessional interest rates (none of which would have jeopardized the banks' profits). Furthermore, the IMF's standard austerity package actually damaged Mexico's economic development. Ironically, economic development would have improved Mexico's ability to manage its finances more effectively in the future. The banks' threats to produce a crisis in Mexico did not represent a remedy of the last resort after other, less extreme, measures had failed (or because other remedies were not appropriate). Rather, they represented an extreme remedy to the banks' previous inappropriate actions, which had caused economic problems in Mexico.

Mexico's $20 billion of internal debt and $73 billion of external debt continue to grow. So enormous is this burden that almost 50 percent of state expenditures were devoted to debt repayment in the first half of 1986. Mexico's economy is not growing to absorb this burden; 1986 gross domestic product was down 12 percent from 1981. Decreases in production have caused a combined unemployment-underemployment rate of almost 50 percent. In effect, no new jobs have been created there since 1981. Wage erosion continues to be a serious problem affecting consumerability. Real wages fell almost 14 percent in 1986, to 40 percent below 1981 levels. Indeed, with triple-digit inflation in 1986, real wages in Mexico hit "their lowest point in 50 years" (Schmitt 1986, 11). Continued reductions in state subsidies of food staples add to inflation and the decline of real wages. Prices soared in 1986: tortillas went up 150 percent, eggs 104 percent, cooking oil 110 percent, beans 201 percent, and bread 280 percent. Reductions in state subsidies of transportation have had similar results: Mexico City's metro fare increased 2,000 percent and bus fares 700 percent.

Mexico suffered from the drop in world oil prices, which "cost . . . almost 6 percent of its gross national product" in 1986. Many observers (including de la Madrid) cite this drop as the cause of Mexico's latest round of economic problems. But a Wharton Econometric analysis blamed Mexico's economic program for

the nation's spiraling debt problem. The study cited "continued upward revision of prices for government-supplied services, the elimination of price controls, the acceleration of the 'slide' in the peso's value in the controlled market, the peso's downward volatility in the free market, high interest rates and the large public debt" (Schmitt 1986, 11). In sum, the Wharton study cited precisely those elements of the IMF's austerity program that were supposed to ensure recovery.

What is most interesting about this latest crisis in Mexico is that it is happening to a government that has already complied with the IMF-imposed austerity program of 1982—a program hailed as the path to economic recovery and the model for other developing countries' debt restructuring. Yet the stunning failure of the austerity program in Mexico is not extraordinary; these programs have had a deplorable record of aggravating poverty and inequality, hindering economic development, and ultimately intensifying debt crises. Why, then, does the IMF continue to impose them? Considering that debt restructuring is such a lucrative business for the banking community, we should not be surprised that the banks insist on austerity measures, even though they are counterproductive in the long run and contrary to the interests of the target state's political leaders and political economy.

Class and Intraclass Conflict

Mexico's foreign debt crisis involved several layers of conflict. One pervasive element was the banking community's collective intrusion into Mexico's class struggle, a move that ultimately compromised the relative autonomy of the state. The net effect of the banks' collective control of capital flows was the social construction of Mexico's political and economic reality (before and after the debt crisis). Mexico originally relied on foreign debt to pay for its "miraculous" development and growth, the green revolution, Echeverría's job creation program, and the enhanced social welfare expenditures of the early 1970s. Mexico's leaders turned to the oil industry to fund the country's plans for recovery and development. But the sharp drop in the price of oil on the global market in the mid-1980s pushed Mexico once again into a serious cash flow shortage.

The State Versus Labor and the Poor

An ongoing historical struggle between the state, on the one hand, and labor and the poor, on the other, preceded Mexico's 1982 foreign debt crisis. Until that time the state had participated in broad and fairly extensive social welfare programs, including subsidies of tortillas and gasoline, pro-labor wage and benefit agreements, health and housing expenditures, and the nationalization of basic industries such as oil and petroleum. The onset of the state's foreign debt crisis and the consequent devaluations of the peso and flight of dollars from the country did not entirely dissuade the state from this position. López Portillo nationalized the banks and raised wages after the currency devaluations.

At the same time, the state decreased some public spending, increased interest rates to discourage credit spending, and increased prices of tortillas and gasoline by as much as 50 to 100 percent to discourage overconsumption. All these measures antagonized labor. Because the state-initiated austerity measures failed to curb the rampant inflation, currency devaluations, and rising unemployment that plagued the country, the PRI changed policy direction. López Portillo's successor, de la Madrid, quickly raised taxes, reduced public works expenditures, and eliminated state subsidies of domestic consumer products. These moves more than doubled the cost of tortillas and gasoline. The business community applauded de la Madrid's approach, which balanced the greatest burden of the deficit on the backs of the workers.

Banks Versus Labor and the Poor

What the state failed to accomplish in its political struggle with labor, the banking community achieved with its collective control of capital flows. The state's austerity program was limited by its historical political relations and process of struggle with the labor force. The international financial community had no such constraints and was in a stronger position than the state to impose an IMF austerity program that was far more disadvantageous to labor. This program included the strict curtailment of imports, further reductions in social welfare expenditures, and significant decreases in wages. Despite labor's intense opposition, the banks'

collective position remained implacable. There would be no renegotiation of Mexico's debt without compliance with the IMF's austerity program.

Through these various levels of class struggle over Mexico's foreign debt crisis in 1982, the structurally unified international banking community intruded into Mexico's domestic affairs. The subsidies of food staples and gasoline, nationalization of some industries, rising wages, and increasing jobs that labor had won from the state were all possible because of the availability of finance capital. Later, however, the international banking community, backed by the IMF, turned back those policies and shifted the political economy to a free-market orientation that assigned a large proportion of the GNP to debt servicing. Thus the servicing of debt and the austerity program compromised the Mexican state's relative autonomy in mediating and managing its own affairs. The debt crisis and subsequent austerity program successfully turned back the clock on class struggle so that labor would later have to struggle once again for gains it had previously won and now lost.

Conclusion

As the history of Mexico's foreign debt crisis reveals, the increasing concentration of capital flow relations mitigates the discretionary powers of the state on several levels. Developing countries saddled with debt must accede to painful and politically inexpedient economic contraction to avoid default. The international community and various national and international institutions are constrained to bail out the banks' loans because default in one of the larger of the troubled developing countries could spell disaster for the world economy. Thus a sovereign government's relative autonomy can, and often is, constrained by the goals of international finance capital. These goals often oppose the state's goals of economic development, health, education, and welfare. Capital flow relations between the state and a structurally unified banking community empower the banks to socially construct the economic and political reality of individual states as well as the global economic system.

Mexico's "rescue" from default bears a striking resemblance to Chrysler's bailout. In both cases a unified banking community elic-

ited state-sponsored bailouts: loan guarantees for Chrysler, and increased IMF quotas and Export-Import Bank special facilities for Mexico. Furthermore, the definitional processes invoked in both cases illustrate two facets of the power of collective purse strings. The banking community's willingness to advance loans allowed Chrysler to operate as a full-line automaker for more than thirty years. The banks' cooperation also enabled Mexico to pay for the development programs of the 1940s and 1950s, the green revolution of the 1960s, and the social welfare programs of the 1970s. Neither Chrysler nor Mexico could have accomplished so much without bank support. But the banking community later turned the same definitional processes against Chrysler and Mexico by defining their situations as crises and then, after the state-sponsored bailouts, as resolvable crises. At each stage only the banks were able to set the definition of the situation.

The structure of the lending consortium unified the banking community in both cases. Chrysler's lending consortium included more than 325 banks. Mexico's involved more than 1,600. The structure of these consortia fused the banks' interests. Moreover, loans to corporations and governments constitute the most lucrative business for banks. Participation in lending consortia is particularly crucial for small U.S. banks, because the law restricts banks from lending more than 10 percent of their assets to a given customer. Since the major commercial banks typically act as lead banks in consortia, small banks depend on good relations with them to ensure inclusion. As we have seen, this dependence empowers the major banks to compel small recalcitrant banks to remain in the consortium and to accept unfavorable terms. This disciplining process guarantees the structural coalescence of the banking community.

The history of Mexico's debt crisis highlights the analytical weaknesses of the pluralist perspective. At no time before, during, or after the crisis was the state a neutral arbiter. Ongoing struggles between private banks, private industry, labor, and the state have always been at the center of Mexico's political-economic processes and have largely determined state policies and practices. Furthermore, participants were clearly unequal in strength and had unequal access to resources. The banking community's privileged access to finance capital enhanced its power over all other actors, including the state. Finally, the state was not insulated at all from

the economic sector. Indeed, it participated directly in the economy, thereby undermining the pluralists' assumption of the separation of the political and economic sectors.

The cases of Chrysler and Mexico both raise the question of the relative autonomy of the state. The literature on this issue does not specify the factors affecting the state's relative autonomy and fails to analyze the effect of capital flow relations. Chrysler's and Mexico's cases suggest that the banking community's collective control of capital flows may compromise the state's autonomy. Because the state cannot generate enough revenue to meet its expenditures, the state itself becomes a major borrower. In addition, the reliance on giant corporations for jobs mitigates the state's relative autonomy from corporations, particularly in periods of state crisis. At such times banks may access at least some of the state's discretionary powers to determine political and economic policies.

Additionally, the struggle over Chrysler's bailout produced an unprecedented reversal in U.S. labor-capital relations. For the first time this century, labor was forced to accede to major wage and benefit concessions. These concessions brought on a long period of concessionary bargaining for all unions and undermined the effectiveness of the strike as a strategy for labor. In Mexico the IMF-imposed austerity program produced a similar reversal of historical labor relations. The conditions of the austerity program included the repression of labor with a no-strike agreement, reductions in the size of the labor force, decreases in wages, the elimination of social welfare expenditures, and the privatization of nationalized industries. In sum, both the austerity program in Mexico and the bailout program for Chrysler placed the major burden of debt renegotiation on the backs of the workers.

Finally, Mexico's crisis illustrates the dialectic of lending relations. Although a reliance on private bank loans initially increased the relative autonomy of the state by enabling Mexico to escape the restrictions of official aid agencies, in the long run it had the reverse effect by forcing Mexico to comply with IMF restrictions. This dialectical relation between the state and the structurally unified banking community is the hinge on which the state's relative autonomy turns, propelled by the process of struggle.

I will analyze the similarities and differences between the corporate and state cases in the concluding chapter.