The Political Economy of Early Debt Payment


On January 15 President
Clinton announced that Mexico had repaid all of
the $12.5 billion it borrowed from Washington to
stave off financial collapse and bail out Wall
Street speculators. The New York Times
(January 16, 1997) reported that "The
repayment of the loan—three years ahead of
schedule—was marked by a celebration at the
White House today presided over by Mr. Clinton
and Treasury Secretary Rubin." In Mexico
President Zedillo celebrated the occasion,
declaring that his government had made a
"bold step toward the economic recovery of
Mexico." According to Zedillo "the
early retirement of the debt demonstrated the
coherence and responsibility the Mexican people
and Government have shown in these times."

While Clinton, Rubin, and
Zedillo claimed the debt repayment was a
reflection of the successful recovery of the
Mexican economy, Guillermo Ortiz, the Mexican
Finance Minister, clarified the issue by stating
that Mexico raised the money for the final
payment to the U.S. Treasury by selling bonds to
investors in Europe, Asia, and the U.S. Hence the
net debt stays the same, and while the rates of
interest decline (the U.S. Treasury pocketed a
profit of half a billion on the loan) the payment
of the debt was not the result of any boom in the

The transfer of debt
payments overseas has depressed the Mexican
economy via exorbitant interest rates (between 35
and 75 percent annual rate) that undermine
industrial and agricultural producers. Widespread
and severe domestic indebtedness, a precarious
financial system dependent on state subsidies,
and a growing rate of bankruptcy are some of the
immediate consequences that afflict the private
sector of the Mexican economy. On the other hand,
the high interest rates attract the return of
overseas speculative capital, who invest in short
term investments in government bonds and in
bargain price purchases of mineral concessions.
On the Mexican side, local investors feel the
whole financial system is insecure and have been
investing heavily in the United States. The
subsidiaries of overseas U.S. banks and
enterprises, also ship most of their profits out,
thus draining valuable and scarce earnings out of
productive investment in Mexico.

On the social front, the
minimum wage as well as general wages and
salaries continue to plummet; the rate of
inflation continues to exceed the annual salary
adjustments that the government imposes through
the State controlled Mexican Labor Confederation
(CTM); and the bulk of agricultural producers,
farmers, and peasants, suffer from declining
income, unequal competition (from the U.S. and
Canada), and lack of credit.

On the political front,
while the state-party, the PRI, continues to
engage in electoral fraud, political
assassinations, and vote buying through
"poverty programs," it is losing its
political stranglehold on the country.

Making Mexico
Safe for Wall Street (and Unsafe for Mexicans)

It should be clear that in
analyzing any country today in the so-called
"free market" era, it is important to
specify the impact that policies have on
different social classes and sectors of the
economy. Thus terms like "macro-economic
indicators" or increases in the stock-market
are meaningless in themselves unless the analyst
tells us who benefits, who pays the cost, as well
as specifying the long-term, large-scale
structural effects on class relations, income
distribution, and development of productive
forces. For example, this past year the biggest
increases in stock prices occurred in countries
going through very severe socioeconomic crises.
Among what stock speculators and investment
brokers refer to as "emergent markets"
Russian stocks grew by 156 percent,
Venezuela’s by 132 percent, Hungary’s
by 95 percent, and Poland’s by 71 percent.
Among the top 5 performers, China, with a growth
of 89 percent, was the only country which has
experienced sustained growth. What all these
countries have in common is a severe
un/under-employment problem, a precipitous
decline in overall living standards, the
auctioning off of lucrative public enterprises to
private overseas investors and opening their raw
materials to foreign exploitation. Brazil, with
30 percent increase in the stock index, Argentina
with 19 percent, and Mexico with 16 percent also
provided lucrative returns to overseas and local
speculators. The liberalization of the markets in
both Russia and Venezuela which attracts foreign
capital is also responsible for the growth of
poverty that encompasses 70 percent of the
Venezuelan and over two-thirds of the Russian
population. In the case of Mexico the 16 percent
increase for bettors in the stock market was
accompanied by further decline in wages. The
government fixed-wage adjustment for 1996 was at
least 10 percent below the actual rate of

Further evidence of the
lucrative profiteering for U.S. speculators in
Latin America was revealed in a study by a New
Jersey-based research group which found that
Latin American funds performed better than all
other U.S.-managed international equity funds.
The study found that the average Latin American
fund returned 27 percent in 1996 putting it ahead
of U.S. equity funds which averaged only 19
percent. The biggest profiteers among the funds
have taken advantage of the privatization of
publicly owned mineral resources, energy,
precious and industrial metals, timber, and real
estate. One of the most lucrative fields for
speculators in Latin America was debt funds
(buying and selling of public overseas debt)
returning 42 percent. The strongest bond funds in
the world had heavy exposure in Latin America
with the top performer GNO Emerging Country Debt
returning 66 percent—containing a 10 percent
weighing in Mexico and a 32 percent weighing in
the rest of Latin America.

The consequences of the
high returns to U.S. speculators, however, are
largely negative, even for many Mexican investors
and businesspeople. In order to attract foreign
capital with high interest rates, the Mexican
government has forced huge increases in the cost
of borrowing for Mexican businesspeople. The
result is large-scale poverty, declining incomes,
and the depression of the internal market; the
growing political and social discontent that
accompanies the stagnant market has generated
widespread insecurity among large and small
Mexican investors, causing them to ship their
money across the border, thus further undermining
any economic recovery. Mexican deposits in U.S.
banks has more than doubled since 1994—from
$12.2 billion to $26.3 billion by July
1996—according to the U.S. Federal Reserve.
Thus, while savings deposits in Mexico declined
by 4 percent in 1996; Mexican deposits in the
U.S. increased by 8 percent in the first half of
the past year. The deposits accumulated in the
first seven months of 1996 in U.S. banks, is
around one-third of the potential savings that
the national private sector deposited in Mexico
at the same time. This outflow does not include
the Mexican share of the approximately 45 billion
dollars that has been estimated to be transferred
by U.S. subsidiaries to the tax paradises in the
Bahamas, Cayman, and Virgin Islands. Clearly the
Mexican government’s early payment of its
external debt obligation has not created a secure
and favorable climate for Mexican savers. Thus
the flight of Mexican capital becomes a further
pretext for greater overseas indebtedness, which
encourages the continuance of excessive interest
rates which further undercuts local production
and encourages greater capital flight. The
Mexican regimes policy of an "open
economy" that liberalizes capital flows has
had a boomerang effect by increasing debt
outflows and encouraging local capital flight.
This undermines any bases for financing the
recovery of the productive economy while
enhancing financial and speculative returns.

The influx of so-called
"portfolio investments" of overseas
speculators does not create jobs for the 65
percent of the Mexican labor force which is under
or unemployed (in the so-called "informal
sector"). The State’s tight control
over wages ensures that the 60 percent of the
labor force working and living in poverty will
not benefit from any dubious projections of
economic growth. The Mexican Confederation of
Chambers of Industries (Concamin) listed 6 major
obstacles to the government’s plans to
overcome unemployment: the weak stimulus of the
internal market for private investors; the
persistent debt among families and firms; the
persistent low private consumption levels; the
unbalancing of external accounts via the import
of inputs by expanding industries. The private
sector expects low levels of real investment and
little likelihood, that whatever growth occurs
will not be jeopardized by political and social
conflict. The latter is inevitable given the
persistence of record high unemployment and
deepening rural poverty generated by the free
market policies.

Meeting Foreign

Mexican minimum wage levels
are among the lowest in the semi-industrialized
world and have suffered severe deterioration as
the Mexican government seeks to attract more
foreign investment on the basis of cheap labor.

As of January 1 the general
minimum wage ranges (by regions) between $3.40
and $2.90 a day. Even among skilled workers and
professionals minimum salaries do not allow for
minimum living conditions. For example, the
minimum wage for truck drivers in the higher-paid
regions is $5 a day; certified nurses have a
minimum of $5.50, auto mechanics $5. In the
countryside agricultural workers average about
$2.50 a day, if and when they receive full
payment. While salaries and wages continue to
decline, basic food prices have been skyrocketing
thanks to free market deregulation. Over the last
18 months the consumption of basic food items has
declined 29 percent. Over the same period while
nominal salaries increased 38 percent, inflation
increased by 66 percent. Basic food items like
beans increased 240 percent, tortillas 86
percent, wheat flour by 305 percent, cooking oil
by 70 percent.

In January 1997 in Guasave
Sinaloa over 3,000 agricultural workers, most
from southern Mexico, went on strike and fought
the police demanding the end of a 4 peso weekly
deduction to fund the government controlled CTM
union and an increase in salary to 25 pesos($3.20
a day). The strike paralyzed the export of 40,000
boxes of vegetables—mostly tomatoes. Faced
with the threat of rotting fruit and the
militancy of the workers, the owners accepted the
70 cents a day raise.

As malnutrition stalks the
land, Mexican agricultural economy shows all the
signs of deformed growth characteristic of the
"free market." Overall the agricultural
sector grew a mere 1.5 percent, which still
failed to compensate for the 3.5 percent decline
in 1995. The net balance between agricultural
food exports and imports was negative to the tune
of 1.5 billion dollars in 1996.

The problem is the basic
inequality of trade between Mexico and its North
American neighbors. Mexican farmers suffer from a
lack of financing and high rates of interest. In
addition the infrastructure is inadequate and the
commercial networks are inferior to that of their
U.S. and Canadian competitors. These material
conditions make it impossible for Mexican
producers to compete within the framework of the
free trade agreement. In the specific area of
corn production Mexico’s average output is
about two tons a hectare while the U.S. output
currently runs to 7 tons with projections to
increase output to 17 tons. But the aggregate
figures hide basic socioeconomic differences:
while 5 percent of the large corn producers grow
over 5 tons per hectare, there are 1.5 million
small farmers producing for subsistence. In the
past year the ranks of the "subsistence
producers" were swelled by the addition of
300,000 corn farmers who were so heavily in debt
and lacking in capital financing, that they were
unable to incur new loans to upgrade production
to become competitive. While government financing
rose slightly to 31.3 billion pesos in 1997 over
26 billion in 1996 (nominal—not corrected
for inflation) the great bulk of the financing
goes to the large agro-business firms. For
example, the regimes main development promotional
agency Alianza para el Campo’s 22 programs
designed to increase income and output, reached
only 10 percent of the producers. The overall
impact in the agricultural sector was negligible.
The result is deeper social polarization between
those big farm exporters who are linked to the
state and the small producers who are excluded
from the government’s subsidy programs.
Because of its commitment to meeting external
debt payments and gross corruption of
agricultural officials who pocket funds destined
for the agro-sector, there is growing social
protest in rural areas. One typical example of
peasant protest occurred early in 1997 in the
state of Chiapas. In January over 350 police
attacked thousands of peasants in the La
Frailesca zone who were blocking highways
protesting the government’s failure to carry
out previous agreements signed in November of the
past year. The original agreement stipulated that
the peasants would accept depressed corn prices
and, in exchange, the government would implement
a Program of Temporary Rural Employment which
supposedly would fund 3 million person hours of
work. The peasants thought that the added income
from this work would compensate for lost income
from depressed prices. The prices stayed low, but
the jobs never materialized. The peasants took to
the streets, the PRI sent in the police, scores
of peasants were injured and jailed. But the
government was able to save money and pay its
debt to the U.S. two years early.

The problems of Mexican
agriculture go far deeper than the impoverishment
of the poor peasant. Middle and even many larger
farm owners are suffering from the squeeze of
high interest rates and declining international
prices. The size of the rural debt continues to
increase and the number of farmers who cannot
meet debt payments is growing. In 1996 over 20.9
billion pesos in loans were far in arrears,
compared to 17.4 billion in 1995. The total
internal public debt in Mexico amounted to 13
percent of the gross internal product.

To avoid foreclosures,
Mexican debtors have organized a nationwide
movement call BARZON which claims two million
members and demands government relief, lower
interest rates, postponement of payments and an
end to foreclosures. Organized protestors have
effectively blocked bank takeovers of farms in
many states. BARZON leaders recently met with
Zapatista leaders in Chiapas and have announced
support in some states for oppositionist
left-wing candidates.

Finance and the

While Mexican government
officials constantly proclaim that a repeat of
the financial crash of 1994 is "remote"
the economic fundamentals to provoke a new crash
are still in place. The government’s
obsession is to keep the current financial system
afloat, no matter what its cost to the rest of
the economy. This reflects the regime’s
increasing dependence on overseas financial flows
and the fragility of this external relationship.
Today Mexico doesn’t seek external finance
to produce, rather it produces to sustain the
financial markets. In 1996 the Mexican
government’s bail out of banks and
large-scale debt holders exceeded 8 percent of
the GNP, a bill that taxpayers will be paying for
the next 29 years. With ballooning external debt
payments in the tens of billions coming due in
1997 and Mexican savings and subsidiary profits
flowing outward, the government is intent on
maintaining the free market economy. President
Zedillo’s only solution is to apply new and
more severe "adjustments" or downward
pressures on the already low wages, privatize
social security funds, and increase the
exploitation of nonrenewable resources (oil,
metals, forestry, etc.) to attract speculative
capital from overseas "money funds."
There is a direct relation between the decreasing
income available to Mexicans and the increasing
dependence on money flow via narcotics traffic.
Corruption and drugs have permeated all levels of
government—while social rebellion grows in
the Southern states and electoral protest spreads
in the northern and central regions of Mexico.

The Decline of
the Party-State

The party-state
dictatorship that has been running Mexican
politics for the greater part of this century is
being challenged: electorally in most of the
country by social movements in a wide range of
social sectors, and by at least three guerrilla
movements in the South. In the electoral field,
political analysts project the combined vote of
the conservative PAN and left of center PRD total
close to 55 percent, while the PRI hovers around
31 percent. In 1997 nearly 50 million Mexicans
will vote for state governors, municipal
officials, and federal deputies. The past year
was a time of electoral triumphs for the PAN,
increasing its vote in the municipal elections by
27 percent, the PRD advanced by 4 percent, while
the PRI declined by 15 percent. Over the last 5
years the PAN has gained 15 million new voters
and will likely win elections in the most
populous Northern and Central states.

The party-state’s
trade union arm, the CTM, concedes that workers
have lost over three-quarters of their purchasing
power over the last 15 years. In response it has
launched a government financed "beans and
rice" give-away program aimed at the poorest
villagers and urban squatters, coinciding with
the electoral campaign. The Zedillo government
can be expected to continue to give free rein to
the PRI paramilitary forces responsible for
killing an average of 2 PRD leaders or activists
a week—over 200 since Zedillo’s
inauguration—none of whom have been

Despite coercion,
corruption, and fraud, the opposition has made
significant inroads, even at the local level. The
PAN has demonstrated strong electoral support in
the northern industrial zones, in the
agro-industrial central western region and in the
State of Mexico, including the capital. The
center-left PRD has its electoral support in the
industrial and middle sectors of the State of
Mexico and particularly in the agricultural
south. Despite its decay and the violent internal
struggles for power and control over narcotraffic
(including numerous murders), the party-state
still has a vast apparatus that penetrates every
village and neighborhood, every sector of the
economy, a vast range of print and electronic
media and billions of pesos of taxpayers’
money and oil revenues to spend on the elections.
As in the past, the U.S. government continues to
back the PRI and the U.S. mass media continue
their support for the Zedillo regime that
controls and runs the party-state.

Washington is not too
perturbed by the decline of the PRI since the PAN
shares the neoliberal program promoted by the
PRI. In fact the PAN would deepen the process of
"globalization" and
"liberalization," if and when it took
power. In the event that neither party gains a
majority, it is likely that the PAN would form a
coalition with the PRI rather than the PRD,
despite the fact that the latter’s
leadership has been offering to be a junior
partner in a coalition for the upcoming
Congressional elections.

While the electoral
opposition is led by the PAN, the picture changes
dramatically when we look at the social
movements. In the countryside particularly in
Oaxaca, Chiapas, Guerrero, Tabasco, and among the
Indian communities, and particularly in a number
of important trade unions (transport, teachers,
university, electrical, and communication
workers), the left-wing of the PRD and the
radical left have been gaining influence. Through
direct action, occupying municipal buildings,
blocking highways, land occupations, urban
marches, as well as strikes, the
extra-parliamentary left has sharply undercut the
PRI’s stranglehold over workers, peasants,
and neighborhood organizations.

Many Mexicans who are
disgusted with the electoral fraud of the PRI
prefer to engage in direct action rather than
vote in elections in which the outcome is decided
by the local PRI bosses. The problem is not the
size or scope of these social movements, but
their dispersed and localized nature. This is
beginning to change. The debtor organization
BARZON, the new national coordinating
organization set up by Indian organizations last
June in Chiapas and the efforts by the Zapatistas
to establish a now inclusive political
movement—a new National Zapatista Liberation
Front (FZLN)—all speak to the growth of a
national challenge to the PRI.

Another source of
opposition is found in the newly emerging
guerrilla movements in the South. The FZLN or the
Zapatistas with their powerful political appeals
throughout the country—despite their limited
geographic sway—and the People’s
Revolutionary Army with its key cadres in some of
the more radicalized and impoverished Southern
rural states. Other smaller armed groups have
also manifested signs of activity. While the
government has militarized the regions of
conflict, its unrelenting pursuit of the
free-market doctrine ensures that social violence
will continue, particularly as the agricultural
policies continue be the enrichment of 10 percent
of the agro-exporters, deepen the indebtedness of
the 30 percent who are middle size farmers, while
impoverishing the other 60 percent mostly
peasantry and landless laborers.

What the U.S. and foreign
investors fear most is the break-down of the
party-state, the loosening of controls over civil
society, and the mass eruption of the social
demands of the tens of millions whose declining
living standards have financed the opening of the
market and the payment of the interest on the
foreign debt. In this context, Washington favors
a peaceful, negotiated transfer of power to the
PAN, and the consolidation of a new
police-military-judiciary structure that can
continue to enforce the rules of the "free


The Mexican
government’s success in attracting the
return of overseas lenders to Mexico following
the 1994 debacle has its counterpoint in the
impoverishment of the Mexican middle class and
the severe pauperization of the lower class. The
Clinton administration’s White House
celebration of the early payback of the bailout
loan has its Mexican side in the proliferation of
guerrilla groups and social mobilization in the
countryside. The 34 percent loss of purchasing
power of salaried workers since 1994 is the other
side of the coin to the exorbitant returns
amassed by the managers of U.S. money funds.
While the privatization process proceeds full
steam ahead in 1996, salaries remain 78 percent
below what they were in 1982 when the current
crises emerged. The conditions for foreign
capital inflows are precisely those that create
massive poverty and social discontent which in
turn encourages the outflow of Mexican savings.
By making foreign debt payments the number one
priority, the government has made the recovery of
Mexican living standards its lowest priority.
Whether through ballots or bullets, Mexico in
1997 is ripe for political change.