B) RENTA PRESUNTIVA FINAL:
1. COSTOS DE LOS ACTIVOS MOVIBLES.
Formally, the liberalisation process began during the administration of President Miguel de la Madrid (1982-1988), however other attempts to liberalise trade occurred between the years 1971-1975 and 1977-1980 but the opposition of domestic producers that have benefited from protectionism and subsidies along the years and an economy policy incongruent with the demand for structural changes led those attempts to fail (see Quiroga (1998) for a historical review). During the balance of Payment crisis (in 1976), President Jose Lopez Portillo (1976- 1982) introduced a moderate liberalisation to diversify exports. Import licences were replaced by tariffs, official prices for imports and exports were removed and imports subjected to permits were reduced gradually (from 90% to 60%). At the same time, export production was stimulated through fiscal incentives and trade credits. Despite of these efforts, the current account still presented high deficits and crude oil remained as the most important export good
during this period. When oil prices fell in 1982, the government abandoned this attempt to liberalise the economy and again introduced import licences to reduce imports.
President Miguel de la Madrid was a neo-liberal economist who differed from the Dependency School ideology regarding protectionism and industrialisation. He introduced economic reforms that included the privatisation of public enterprises, fiscal reforms, subsidy reductions and foreign investment promotion. In general terms, he instrumented an open strategy reliant on external sources (non-oil exports) and he would later implement measures to bring back the period of stabilisation but without protectionism. The crisis in 1982 had shown that the country could not longer rely on oil exports as its most important source of foreign exchange.
As it was mentioned before, the outward oriented policy was also the consequence of different circumstances that prevailed in the 1980s. The IMF intention letter signed by Mexico due to the external debt, was a preliminary step to open the economy to international competition. This was translated in a reduction of protectionism and the possibility of foreign capital to invest in areas that were considered restricted. To solve the problems of lack of resources after the moratorium on debt servicing, the government set as an objective to reach positive GDP growth rates. In 1984, the coverage of imports subject to license reduced from 83% to 27%, and tariffs on intermediate and capital goods were adjusted downward. In 1986 a tariff reduction was established to go from 100% to 30% in four stages but the Mexican accession to the GATT in that year accelerated this reduction to a maximum of 20%. In 1991 only 8.9% of imports value was subject to permits and the average tariff was 11%.
President Carlos Salinas who was also a neo-liberal economist, followed the same strategy to open the economy and to join international trade agreements. Salinas continued the privatisation process, so public enterprises were sold off or closed, they went from 449
enterprises in 1988 to 216 in 1994. Commercial banks were privatised as well as important companies such as Telefonos de Mexico, Fertilizantes Mexicanos, Aeromexico and Altos Hornos de Mexico. President Salinas introduced changes in the foreign investment law to allow foreign corporations and investors to own businesses and increase their share in financial assets. Article 27 in the Mexican Constitution was also modified to change the system of land tenure (ejidos) and facilitate foreign investment in this resource.
When liberalisation was first considered in 1976, national business lobbies lacked sufficient strength and perhaps motives to force entry to the GATT. By 1986, those businesses that were most likely to benefit from freer trade had increased significantly. Some suggest that Mexico moved rapidly toward free trade for four reasons: a institutional arrangement change, asymmetric information, commitments of policymakers and the shift in macroeconomic expectations of policy (Pastor and Wise, 1994).
One of the most important achievements of liberalisation was Mexico’s integration to NAFTA in 1994. This was a result of an openness process that looked for regional and international integration to the world markets where Mexico had comparative advantages. NAFTA has increased even more Mexican exports to the North-America market but it has also diverted exports from third countries. At the same time, the geographical situation also favoured preferential tariffs among both countries even before NAFTA (a preferential agreement already existed since the early 1920s in the US-Mexican border).
Inevitably, the structural change caused affected many productive sectors that were inefficient and had large production costs. Many domestic producers reconsidered their role in the economy as a more open economy meant that they would have to compete with others. On the other hand, it forced them to use economic resources efficiently in order to remain in the market. Remaining enterprises had to invest in technological processes, in economies of scale
and in satisfying international quality standards (for example ISO9000, Just in time, etc.). The reallocation of resources also created social costs due to jobs and production losses. According to Pastor and Wise (1994):
“While there are some direct beneficiaries from open trade, such as northern exporters with strong ties to US markets, most small and medium-sized producers largely have failed to cash in on the Mexico’s recent export boom” (pag. 467).
On the other hand, liberalisation has also led to an administration reform capable of supplying the infrastructure and regulatory schemes required for global and domestic investment. In some way it also forced a sensible management of government policies to guarantee economic and political stability, something that became determinant to attract international capital and gain credibility. This issue is controversial when the stability in nominal variables becomes the most important target for policy makers, more than solving urgent claims from the population. This sort of decision appears unfair to many anti- globalisation organisations and generates controversial opinions about the subordination of social investment.
It is evident that liberalisation has reduced the government’s intervention in the economy. When Mexico entered the OECD (June 1994), it was seen as an event that consolidated the reforms started in the mid 1980s. Since then, there has been a process of economic openness leading to the reduction of administrative regulation, control of prices, the establishment of property rights and the compromise to keep minimum governmental intervention and, at the same time, to promote economic growth. According to the Fraser Institute (2001), there is a positive correlation between economic freedom and growth. They
calculated a trade openness index (TOI)23 that measures the degree of government
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intervention in international trade and it revealed that Mexico experienced the largest increase in its TOI from 1.8 (1980-1982) to 7.5 (1995-1997). Apparently the estimates indicate that every one-unit change of the index increases growth by two tenths of a percentage. During NAFTA, 57% of tariffs were eliminated, there are no more subsidies for national producers, or requirements to create value added (except regional content). The financial sector was opened to international capital, however the oil sector (in the hands of Petroleos Mexicanos) remained as a public property as well as other key industries.
4.5 Conclusions
At the beginning of the ISI period, Mexico experience high GDP growth rates (6.6% annual) and social conditions improved, however the economic dynamism was also accumulating structural problems that later would originate the first of many economic crisis. At the end of the 1960s, there was a significant deficit in the current account, an inefficient national industry, overvaluation and excessive public expenditure. Many adjustments were needed to maintain the same production dynamism as well as the same planning regimen. However, in the 1970s, the oil boom and the availability of cheap international loans led the government to depend strongly on oil exports, public spending and external debt to stimulate economic growth.
The weak national industry created by protectionism and the dependency in primary goods such as crude oil put the country in a vulnerable situation. During the 1970s and early 1980s, there was an intense increase in deficits not only in the current account but also in the fiscal balance. The oil prices decline in 1982 and the moratorium on the debt service were an indication that a strategy based on a paternalist economic model had come to an end. The debt crisis was the most important factor to re-evaluate protectionism. The renegotiation of the
debt service and the transition to a neo-liberal administration were the precedents for considering the viability of an outward oriented strategy.
Openness was a feasible way to achieve growth through the promotion of international trade and foreign investment. Both were seen as ways to improve welfare conditions as well as the production structure. Liberalisation in the 1980s has led Mexico to become member of international organisations as well as to sign free trade agreements with its most important trade partners in America and Europe. Through this process, Mexico has achieved diversification in its export structure, from oil to manufactured goods. In general, international trade and FDI have increased their share in GDP.
On the other hand, trade liberalisation and foreign investment represent a two-side situation for the Mexican economy. Openness by itself cannot solve structural problems if there is not an effort to maintain macroeconomic stability. Poverty has not been alleviated and real wages have deteriorated despite rises in productivity.
Exports and foreign investment now play an important role in the economy due to stability policies to achieve inflationary and output growth targets. However, as a developing country, the role of the government is essential in this process. Openness by itself is not enough to take Mexico to the next development stage, government intervention (in a very different perspective from the predictions of the Keynesian or Dependency scholars) is needed. Intervention is still necessary to guarantee equilibrium in the fiscal balance, in the resource allocation, in the provision of infrastructure, in the control of money supply but at the same time in the creation of economic conditions to stimulate domestic and foreign investment.
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