An Overview of the Mexican Economy

Long-Run Growth Patterns

From a long-run perspective Mexico's growth performance has been quite remarkable. After 1930, real GDP increased at a rate of 2.9 percent per annum between 1930 and 1940, accelerating to 6.9 percent annual growth from 1940 to 1950, then leveling off at 5.6, 7.0, and 5.5 percent growth rates for the 1950-60, 1960-70, and 1970-80 periods, respectively. Increases in employment and growth in industry have followed this same pattern (tables 1.1 and 1.2). The resulting structural changes have shifted (table 1.3) the economy from one largely oriented toward agriculture (20 percent of GDP to 9 percent, 1930-80) to one which is becoming increasingly industrial (25 percent GDP to 39 percent 1930-80). However, the Mexican economy still depends on services as the major source of income (55 percent to 52 percent, 1930-80). Recent growth (table 1.4) has been (197881) in the 8 to 9 percent per annum range, led by mining, construction, and transportation.

In addition to achieving relatively high overall GDP growth rates, the Mexican economy has also generated relatively high levels of savings and capital formation; the latter had been at about 20 percent of GDP during the 1960s and had risen to 28 percent by 1979. Still, these figures were somewhat below the 39 and 55 percent experienced by Singapore and Korea, respectively, in 1979 (table 1.5).

A World Bank study of gross marginal or incremental capital output (ICOR) offers a broader comparative perspective on Mexican growth. This measure relates the change in capital stock to the change in GDP (at constant prices) with a one-year lag. The Bank's calculations yielded an ICOR for Mexico of 3.2 for 1951-60 and 2.7 for 1961-67. To be sure, these figures are not very high when Mexico is compared to the more advanced countries, where the introduction of labor-saving technology commonly produces ICOR values of 4 to 6. However, Mexico's ratio is well above those of many of the recent success stories among the developing countries such as Taiwan, Hong Kong, and South Korea, and even above those of slightly less rapid growth cases such as Thailand. Each of these countries has growth that was about as fast as in Mexico, but their incremental capital output ratios averaged around 2.0. Admittedly a low incremental capital output ratio does not necessarily indicate successful labor-intensive development. However, given the relative abundance of labor in most of these countries, a low incremental output ratio does imply an efficient allocation of resources.

In terms of a simple capital coefficient (the rate of growth in gross domestic product divided by the rate of growth in gross domestic investment), Mexico fares relatively better. During the 1960s and 1970s (table 1.6), Mexican GDP tended to grow about 75 percent as fast as investment, lower than Brazil for both periods and considerably below Singapore and Korea for the 1960s, but considerably above the latter two countries' respective 41 and 44 percent in the 1970s.

Major Economic Trends and Developments

Despite this seemingly rosy picture, a number of structural imbalances have also characterized Mexico's development, particularly in the interconnections between the economy, social classes, and the political system. These have been noted at length in the literature and can be summarized as follows:

1. The growth of the economy over the last three decades has been promoted through a strategy of industrialization. Agriculture was deemphasized after having financed the industrial take-off. Economic growth has been very unbalanced and has sharpened the inter- and intrasectorial inequalities as well as the regional differences in Mexican society.

2. Industrialization through import substitution has ultimately led to an increasing dependence on foreign imports.

3. The agricultural sector has experienced structural change as a result of the emergence of modern agricultural corporations in the 1940s, producing export crops on most of the best irrigated lands in the northern regions of the country.

4. The small property owners and subsistence farmers who made up the remainder of the agricultural sector were largely neglected and subsequently have seen their relative standards of living decline.

5. Declining relative incomes together with strong population pressures in rural areas have induced large segments of the rural population to migrate to the cities in search of better income and living conditions. In most cases migrant rural workers have added to urban underemployment problems as they become part of the reservoir of cheap unskilled labor for the urban industries.

6. The accumulation of capital has occurred increasingly at the expense of consumption. The extreme inequalities in income distribution have added to what was at times an inflationary environment. In addition, the relatively low rate of taxation has permitted high profit rates.

7. The poverty of the lower income groups has hampered the expansion of the domestic market, while the middle classes that grew with the expansion of the diversification of the economy and the government bureaucracy generate insufficient demand. Further industrial growth, especially of those industries dependent on large markets, may therefore depend on changes in income distribution (which in turn would require drastic changes in the power relations within the political structure).

8. The Mexican economy has become more and more dependent on direct and indirect foreign (mostly U.S.) investment. Foreign economic interests have become a powerful pressure group. They do not dominate the country directly, but impose sharp limits on external and internal economic policies.

9. The import and export trade has been directed toward the United States. The importance of U.S. tourism and border transactions has further increased the dependence of the Mexican...