1. POLITICS IN MEXICO LUIS ESTRADA lmestrad@weber.ucsd.edu Spring quarter 2005

2. Stabilization and Structural Change (Aspe 1991) Stabilization: First phase, control inflation, exchange rate Stabilization: First phase, control inflation, exchange rate Structural Change: Open the economy, get rid of inefficient SOEs Structural Change: Open the economy, get rid of inefficient SOEs Shared goal: Sustained economic growth with price stability Shared goal: Sustained economic growth with price stability

3. Stabilization and Structural Change (Aspe 1991) Mexican “miracle” (1950-1970): GDP grew 6.6 %; inflation below 4.5 % per year Mexican “miracle” (1950-1970): GDP grew 6.6 %; inflation below 4.5 % per year Huge investment in infrastructure, active land distribution, and industrialization Huge investment in infrastructure, active land distribution, and industrialization Backed by strict fiscal and monetary policies Backed by strict fiscal and monetary policies

4. Stabilization and Structural Change (Aspe 1991) Monopolies did not have incentives to grow in employment or productivity (captive markets) Monopolies did not have incentives to grow in employment or productivity (captive markets) Two alternatives in the 1970s: to become export- oriented (as Southeast Asian countries) or keep replacing private investment with public spending… Two alternatives in the 1970s: to become export- oriented (as Southeast Asian countries) or keep replacing private investment with public spending… Despite preliminary evidence of failure, oil discovery kept the hope alive of continue the external borrowing Despite preliminary evidence of failure, oil discovery kept the hope alive of continue the external borrowing

5. Stabilization and Structural Change (Aspe 1991) Solution: Solve the inflation problem not only from the monetary view, but also from the expectations view Solution: Solve the inflation problem not only from the monetary view, but also from the expectations view Experiences of Brazil and Argentina failed (went too quick after controlling inflation) Experiences of Brazil and Argentina failed (went too quick after controlling inflation) Pact for Economic Solidarity (PSE) / Pact for Stability and Economic Growth (PECE) in December 1987 with representatives of the labor, farming, and business sectors + government Pact for Economic Solidarity (PSE) / Pact for Stability and Economic Growth (PECE) in December 1987 with representatives of the labor, farming, and business sectors + government

6. Stabilization and Structural Change (Aspe 1991) Permanent (monitored) commitment to start reducing inflation Permanent (monitored) commitment to start reducing inflation Govt. promised to control its finances (sell SOEs and reduce the size of the administration) Govt. promised to control its finances (sell SOEs and reduce the size of the administration) Restrict credit expansion Restrict credit expansion Longer term contracts that included anticipated inflation Longer term contracts that included anticipated inflation Trade liberalization Trade liberalization

7. Stabilization and Structural Change (Aspe 1991) Reduction in income tax from 50 to 35%; VAT from 15 to 10% (lower rates, broader tax base, less evasion) Reduction in income tax from 50 to 35%; VAT from 15 to 10% (lower rates, broader tax base, less evasion) 80 percent of 1,115 SOEs that existed in 1982 were sold 80 percent of 1,115 SOEs that existed in 1982 were sold Started selling small ones, then the big ones Started selling small ones, then the big ones Accumulated success; ending of inefficient subsidies Accumulated success; ending of inefficient subsidies

8. Stabilization and Structural Change (Aspe 1991) Renegotiation of foreign debt (supported by success in the local economy), and ‘technocratic’ connections Renegotiation of foreign debt (supported by success in the local economy), and ‘technocratic’ connections Less uncertainty brought better financial instruments (longer ‘maturity’) that eased financing the economy Less uncertainty brought better financial instruments (longer ‘maturity’) that eased financing the economy Re-privatization of commercial banks Re-privatization of commercial banks Potential free-trade agreement with the U.S. Potential free-trade agreement with the U.S.

9. Stabilization and Structural Change (Aspe 1991) Results: Inflation dropped from 159% (1987) to 18% (1991); today is 4% Results: Inflation dropped from 159% (1987) to 18% (1991); today is 4% From 1988 to 1991 GDP grew positively, ranging from 1.3 to 4.4%; today is around 4% From 1988 to 1991 GDP grew positively, ranging from 1.3 to 4.4%; today is around 4% International reserves in 1991 were $16 billion USD; today over $60 billion USD (highest in history) International reserves in 1991 were $16 billion USD; today over $60 billion USD (highest in history)