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Monday, December 18, 2006


The Rise and Decline of Mexico

As part of an assignment for our Power and Prosperity course, I reviewd Alvaro Vargas Llosa's publication Liberty for Latin America: How to undo Five Hundred years of State Oppression. In the book, Llosa presents a theory of Latin American economic underdevelopment in which the Latin American State is pointed to as the most significant obstacle for the region's progress. The author subscribes to an argument for economic prosperity similar to the one proposed by Mancur Olson in the book Power and Prosperity. In my own interpretation of Olson's and Vargas's thesis of development, I would say that they both believe economic productivity and prosperity depends on motivating the economy's individuals to be as productive as possible. Because people always act in a rational and self-interested manner, the most effective and enduring incentive for productivity is to allow them to accumulate and/or enjoy the benefits of their own production.
In the Logic of Collective Action, Olson explains how collectivities, or groups, are not as able to define and pursue an interest as individuals are. He presents a 'book-long' explanation of why collective action is a difficult objective, but one simplistic way to sumarize it would be to say that individuals assume the full costs and benefits of their actions, on the other hand, groups of individuals can not assign costs and benefits within their membership in the same 'automatic' manner. As a result, when said groups pursue collective action, their objectives, their costs, and their benefits are not shared equally by all individual members. The term "collective action" is misguiding because such action can not and does not represent the intentions and/or interests of the entire collectivity, but only those of one or a few members. That is why individuals play such an important role in the general prosperity of a collective economy. Collectivities are not 'well-equiped' to manage resources because only the interests of some of its fractions will be considered in doing so. From this logic one can conclude that allowing and protecting individual property rights is a very good way to ensure that economic resources will be administered properly and that they will be as productive as possible. Individuals must be the protagonists of the economy, not the government, not any other collectivity. Olson's theories conclude that a nation in which individual ownership of assets is fostered and protected and there is no 'predation' on the economic 'efforts' of individuals, productivity will be closer to optimal and prosperity can occur. Vargas applies this concept to the case of the Latin American economies and proposes that the State's dominant position as the central character and main conductor of the economy is the reason why no 'antidote' for economic retardation has worked in the subcontinent.
As I found out by reading Liberty for Latin America, practically every Latin American nation can be used to support Olson's (and Vargas's) thoughts on the recipe for prosperity, although these cases would be found in the section listing the 'bad' examples, those instances in which the prescription is not followed and 'undesirable' things happen. I think the case of Mexico is probably the one of most interest for people in the United States, so I decided to take a quick look at the economic/political model in Mexico and try to identify a few of the symptoms diagnosed by Vargas and that would go against Olson's optimal model of prosperity.
In a previous posting I discussed the post-colonial legacy imprinted on the political culture of Nigeria. The case in Latin America is very similar. The Spanish and Portugese monarchies also utilized very centralized and authoritarian units of government in order to mantain a stable regime that incorporated different corporate groups into one, universal, mission to extract wealth and chanel it back to the royalty back in Europe. This culture of authoritarian central government has proven hard to ellude for a country like Mexico.
After independence, the southern nation struggled to create a unifying national identity and 36 different heads of state attempted to take possesion of power until Porfirio Diaz came to power in the 1870s. Diaz established a very powerful dictatorship that lasted more than three decades. One of his most important goals was to develop the Mexican economy and Diaz's autocracy was characterized by an incredibly interventionist state. He saw foreign investment as a vehicle for development and also as a very effective way to enrich his personal coffers. Foreign penetration of the economy and ownership of land and other resources was a great source of discontent and eventually became one of the driving themes of the revolution that ousted Diaz in 1910. The Mexican revolution is known as the first great social revolution of the twentieth century, approximately 2 million Mexicans died as a result of the violence and the economic devastation. This revolution is the single most important shaping force of the modern Mexican State.
In addition to many other significant transformations that the revolution caused and that would not be very useful to mention right now, a constitutional democracy was established in Mexico in 1917. However, the emerging system did not overcome the nation's legacy of authoritarian and corporatist political culture. In fact, in order to appease the different factions that had carried out the revolution, an even more sophisticated and rigid corporatist structured was designed and implemented in Mexico: The PRI, the Institutional Revolutionary Party, which came to dominate Mexican politics and held a power hegemony that lasted 70 years. The Mexican government, and more specifically the PRI, was succesful in creating a system of groups' representation that ensured submission to a very authoritarian regime that, as mentione previously, ruled Mexico for seven decades. Just like in many other Latin American nations at the time, the emerging "democracy" of the early 1900s relied on appeals to nationalism and as a concequence, to economic nationalism. Mexico adopted a model of development consistent with Import Substitution Industrialization (ISI) which yielded very impressive growth rates and development. However, the Mexican industry eventually reached the inevitable 'bottlenecks' that characterize this type of model and the Oil bust and ensuing debt crisis of the 1980s forced the State to redesign their approach to economic development and prosperity. Liberalization and privatization have since replaced the ISI strategy. In 1994 Mexico signed the North American Free Trade Agreement with the U.S. and Canada and in the last decade the government has privatized more than 1000 enterprises. However, the last ten years have also been marked by very low rates of growth.
Throughout its history of development, Mexico's powerful and interventionist State has mantained its status. All attempts to create a new economic path are not only designed, but also controlled and dominated by the 'all-mighty' Mexican state. According to the Constitution of 1917 (still standing), the Mexican state reserves 'discretion' with regards to all property rights. This document was used, in fact, to nationalize the oil industry in 1938 and the national banks in 1992, just to mention the two most famous cases. As long as the government mantains its postion as main administrator of the economy and the State's institutions do not function in relation to individuals, fostering and protecting their property rights, Mexico is not likely to overcome its longstanding affiliation with economic underdevelopment.

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