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.