ECONOMICS IN LATIN AMERICA
San Patricio Malaque, Jalisco, Mexico, Tuesday, 14 February 2006
Valentine’s Day! Only six more days till Kathleen gets back. I have decided to stay here in the “Malarky”/Barra de Navidad/Tenacatita area until she gets here. By that time I should have all the spring cosmetic work done and can take it easy. On 20 Feb 06 I am supposed to get a large translation job so I will be handy here to the web.
It is also my son Andrew’s 20th Birthday. So Happy Birthday! Kathleen and I both are excited about him crewing with us to the Galapagos Islands and Ecuador in April. It will be his first time on Vilisar since he was fifteen and the first time that he has been aboard alone with us, i.e. without the presence of his sister and brother.
Economics in Latin America
When you visit Mexico it comes as no surprise to see that it is some mixture of “First” and “Third World”. The standards of living along the coast in these beach strips, in the Sierras when we were there and in many of the small towns appear to be very low. On the other hand Mexicans always seem to be working and hustling and there are signs everywhere of an earlier prosperity. So, what happened? Why isn’t Mexico prosperous now?
The first thing to remark is that, compared to twenty years ago, Mexico is probably relatively more prosperous. But Mexico, like much of Latin America, is only now recovering from a first debt crisis in 1980 and another one in the 1990’s. The Clinton Government bailed Mexico out of the second one, thus probably reinforcing Mexico’s client-state relationship with its big neighbour to the north.
Except for a brief interlude in the 1930’s, between 1900 and 1980 Mexico and Latin America generally grew steadily on the back of global (read “First World”) demand for raw materials and foodstuffs, i.e. it was an export-driven growth. In return, Latin America bought manufactured products from the U.S.A. and Europe. In the 1930’s Latin American governments began a programme of import-substituting industrialisation, i.e. instead of importing manufactured products, Latin America wanted to continue exporting resources while manufacturing the industrial products for themselves. It was hoped too that they could also export the same finished products to Europe and the U.S.A. This programme was not without its success especially in the larger Latin American countries like Brazil, Argentina and Mexico. Steel plants were built and so were modern automobile and other plants. For their part, the local national governments borrowed money internationally and undertook huge infrastructure projects like dams, electricity generating plants, highways, railways, land clearances, pipelines, etc. The borrowing and the building increased when oil was discovered in some Latin American countries.
Unfortunately, individual national markets in Latin America were not big enough to handle the scale of production upon which modern, automated processes were predicated. It might have been better to manufacture to take advantage of low wage levels in Latin America. But business executives – most of them also imported - preferred technologically advanced machines that had the added advantage of never going out on strike. Countries like Mexico had to pay for the importation of highly complex machine tools and other technological equipment from the First World. And, since the plants were mainly branches of American, European, and later Japanese companies, it was obvious that they would never be allowed to export these products to other industrial countries unless the head offices permitted, which they generally did not. It had been hoped that, not only would import-substituting industrialisation reduce the drain on foreign currency reserves, it was also hoped that the programme would provide the many new jobs that a burgeoning population of young people required. Some jobs were created, of course, but not nearly enough. Unable to sell enough products domestically and finding First-World markets blocked, Latin American countries began to push for regional or hemispheric free-trade zones. This has not been very successful.
The sudden and rapid rise of petroleum prices created by the OPEC cartel in the 1970’s gave those Latin American countries like Mexico that had oil a huge boost in creditworthiness. American and other international banks were swimming in petro-dollars – the collections from the sale of oil (always in US $) to the First World and were then deposited by OPEC countries (generally short-term) with First-World banks. The banks were desperate to lend it out. They provided the (generally long-term) financing for the huge development programmes along capitalistic models so heartily recommended by the World Bank and the International Monetary Fund.
For a while the demand created for machinery and the like by both developing countries in Latin America and the Middle-Eastern (e.g. Saudi Arabia, Iraq, Libya, and others) kept First-World capital-goods economies humming. But the second hike in oil prices in the mid-70’s sent most of the global industrial economy into another tailspin. There was Mexico and other Latin American countries with huge amounts of debt, inflation rates and therefore interest rates out of control (*thanks in large part to the Vietnam War), and unable to export the new industrial products being made in the their over-dimensioned factories. The result was economic recession in the First World, near or actual collapse in other countries, massive devaluations, and years of hard pulling to get back even to the levels of 1980.
The “bottom line” is that the countries of Latin America are still exporters of resources, are vulnerable to downturns in First-World markets, are saddled with huge amount of debt for infrastructure and plant that they cannot use efficiently, and are not much closer to solving the structural economic problems that stem from high population-growth rates and dependency upon the developed countries. Whereas the Asian Tigers and SE Asia generally have struck out on a different path (picking national champions, protecting them behind tariff walls, keeping exchange rates favourable, etc.), and while the under-developed fringe countries of Europe, like Ireland, the Mezzogiorno, Greece, Spain, and Portugal, have been, or, like Eastern Europe, are about to be integrated into “Europe” where they will enjoy the benefits of a modern, First-World economy, Mexico is being reduced to a client-state relationship to the U.S.A. American drive and equity will determine the running provided the population remains quiescent, which will surely remain the aim of the Mexican and Latin-American elites.
The Mexican government, dominated for decades by the aristocratic, arrogant and corrupt PCI was finally turned out and a new government under Vincente Fox installed at the end of the 1990’s, a real democratic breakthrough. As a means of solving its intransigent structural problems, Mexico joined NAFTA, the World Trade Organisation (WTO) and opened its markets. NAFTA has had only limited impact on Mexico; WTO and globalisation have probably had much more. While Mexico could originally compete with their duty-free Maquiladoras along the border and their low wage rates, now they are losing industrial production either to the countries of SE Asia, mainly China where production costs are lower and local champions are protected in the same way that Japan did several decades ago, and where currencies are kept artificially low to stimulate exports. Not dissimilar, then, from Germany after WWII and the “Asian Tigers” in the 1960’s. In Europe, it is probably just as cheap to produce in Slovakia, Poland and The Ukraine as it is in Mexico. The devalued Mexican peso has also made Mexican companies vulnerable to takeovers by First-World companies, mainly Americans. Mexican agriculture is also overpowered by highly-subsidised U.S.A. agri-business.
Mexico has two choices though it might possibly be too late to solve its structural problems. It can continue to integrate itself into a North American and therefore U.S.A.-dominated free-trade area. Canada has done this and seen the share of manufacturing drop as part of its GDP. It seems to becoming a resource supplier again. Those industries that Canada does possess are totally integrated into the North-American market and are largely American-owned anyway. Mexico and Canada, in other words, can therefore be “hewers of wood and drawers of water”. The greater problem for Mexico is, however, that although it does have some minerals, its main natural resource is petroleum. That said, Mexico’s proven reserves are dropping, potential new wells in the Caribbean will be much more expensive to develop and will therefore require much more outside help and investment. Like most branch-plant economies, the funding is likely to come only in the form of ownership equity.
(Canada, by comparison, is much larger and has a much broader spread of natural resource ranging from fresh water to uranium. With huge oil sands on the eastern slope of the Rockies and the price of petroleum currently at $60 a barrel, Canada is much more of an oil/natural gas producing nation than Mexico; including the oil sands, Canada has now been rated as the country with the second largest amounts of proven oil reserves after Saudi Arabia. How Canada will deal with this when it is already totally integrated into the North American market remains open. Its population, albeit aging, is much smaller than Mexico’s. But Canada is, on the other hand, much more of an industrial, albeit a branch-plant, economy with the educational, technological, transport and communication infrastructure already at a relatively high standard.
Mexico, on the other hand, has nothing like the same amount of resources and its much larger population, half of it under the age of 25 years old, has to find an outlet for its energies. Large number of Mexico’s working equity, its young people, had for the U.S.A. But there are still lots of people at home looking for jobs.
San Patricio Malaque, Jalisco, Mexico, Tuesday, 14 February 2006
Valentine’s Day! Only six more days till Kathleen gets back. I have decided to stay here in the “Malarky”/Barra de Navidad/Tenacatita area until she gets here. By that time I should have all the spring cosmetic work done and can take it easy. On 20 Feb 06 I am supposed to get a large translation job so I will be handy here to the web.
It is also my son Andrew’s 20th Birthday. So Happy Birthday! Kathleen and I both are excited about him crewing with us to the Galapagos Islands and Ecuador in April. It will be his first time on Vilisar since he was fifteen and the first time that he has been aboard alone with us, i.e. without the presence of his sister and brother.
Economics in Latin America
When you visit Mexico it comes as no surprise to see that it is some mixture of “First” and “Third World”. The standards of living along the coast in these beach strips, in the Sierras when we were there and in many of the small towns appear to be very low. On the other hand Mexicans always seem to be working and hustling and there are signs everywhere of an earlier prosperity. So, what happened? Why isn’t Mexico prosperous now?
The first thing to remark is that, compared to twenty years ago, Mexico is probably relatively more prosperous. But Mexico, like much of Latin America, is only now recovering from a first debt crisis in 1980 and another one in the 1990’s. The Clinton Government bailed Mexico out of the second one, thus probably reinforcing Mexico’s client-state relationship with its big neighbour to the north.
Except for a brief interlude in the 1930’s, between 1900 and 1980 Mexico and Latin America generally grew steadily on the back of global (read “First World”) demand for raw materials and foodstuffs, i.e. it was an export-driven growth. In return, Latin America bought manufactured products from the U.S.A. and Europe. In the 1930’s Latin American governments began a programme of import-substituting industrialisation, i.e. instead of importing manufactured products, Latin America wanted to continue exporting resources while manufacturing the industrial products for themselves. It was hoped too that they could also export the same finished products to Europe and the U.S.A. This programme was not without its success especially in the larger Latin American countries like Brazil, Argentina and Mexico. Steel plants were built and so were modern automobile and other plants. For their part, the local national governments borrowed money internationally and undertook huge infrastructure projects like dams, electricity generating plants, highways, railways, land clearances, pipelines, etc. The borrowing and the building increased when oil was discovered in some Latin American countries.
Unfortunately, individual national markets in Latin America were not big enough to handle the scale of production upon which modern, automated processes were predicated. It might have been better to manufacture to take advantage of low wage levels in Latin America. But business executives – most of them also imported - preferred technologically advanced machines that had the added advantage of never going out on strike. Countries like Mexico had to pay for the importation of highly complex machine tools and other technological equipment from the First World. And, since the plants were mainly branches of American, European, and later Japanese companies, it was obvious that they would never be allowed to export these products to other industrial countries unless the head offices permitted, which they generally did not. It had been hoped that, not only would import-substituting industrialisation reduce the drain on foreign currency reserves, it was also hoped that the programme would provide the many new jobs that a burgeoning population of young people required. Some jobs were created, of course, but not nearly enough. Unable to sell enough products domestically and finding First-World markets blocked, Latin American countries began to push for regional or hemispheric free-trade zones. This has not been very successful.
The sudden and rapid rise of petroleum prices created by the OPEC cartel in the 1970’s gave those Latin American countries like Mexico that had oil a huge boost in creditworthiness. American and other international banks were swimming in petro-dollars – the collections from the sale of oil (always in US $) to the First World and were then deposited by OPEC countries (generally short-term) with First-World banks. The banks were desperate to lend it out. They provided the (generally long-term) financing for the huge development programmes along capitalistic models so heartily recommended by the World Bank and the International Monetary Fund.
For a while the demand created for machinery and the like by both developing countries in Latin America and the Middle-Eastern (e.g. Saudi Arabia, Iraq, Libya, and others) kept First-World capital-goods economies humming. But the second hike in oil prices in the mid-70’s sent most of the global industrial economy into another tailspin. There was Mexico and other Latin American countries with huge amounts of debt, inflation rates and therefore interest rates out of control (*thanks in large part to the Vietnam War), and unable to export the new industrial products being made in the their over-dimensioned factories. The result was economic recession in the First World, near or actual collapse in other countries, massive devaluations, and years of hard pulling to get back even to the levels of 1980.
The “bottom line” is that the countries of Latin America are still exporters of resources, are vulnerable to downturns in First-World markets, are saddled with huge amount of debt for infrastructure and plant that they cannot use efficiently, and are not much closer to solving the structural economic problems that stem from high population-growth rates and dependency upon the developed countries. Whereas the Asian Tigers and SE Asia generally have struck out on a different path (picking national champions, protecting them behind tariff walls, keeping exchange rates favourable, etc.), and while the under-developed fringe countries of Europe, like Ireland, the Mezzogiorno, Greece, Spain, and Portugal, have been, or, like Eastern Europe, are about to be integrated into “Europe” where they will enjoy the benefits of a modern, First-World economy, Mexico is being reduced to a client-state relationship to the U.S.A. American drive and equity will determine the running provided the population remains quiescent, which will surely remain the aim of the Mexican and Latin-American elites.
The Mexican government, dominated for decades by the aristocratic, arrogant and corrupt PCI was finally turned out and a new government under Vincente Fox installed at the end of the 1990’s, a real democratic breakthrough. As a means of solving its intransigent structural problems, Mexico joined NAFTA, the World Trade Organisation (WTO) and opened its markets. NAFTA has had only limited impact on Mexico; WTO and globalisation have probably had much more. While Mexico could originally compete with their duty-free Maquiladoras along the border and their low wage rates, now they are losing industrial production either to the countries of SE Asia, mainly China where production costs are lower and local champions are protected in the same way that Japan did several decades ago, and where currencies are kept artificially low to stimulate exports. Not dissimilar, then, from Germany after WWII and the “Asian Tigers” in the 1960’s. In Europe, it is probably just as cheap to produce in Slovakia, Poland and The Ukraine as it is in Mexico. The devalued Mexican peso has also made Mexican companies vulnerable to takeovers by First-World companies, mainly Americans. Mexican agriculture is also overpowered by highly-subsidised U.S.A. agri-business.
Mexico has two choices though it might possibly be too late to solve its structural problems. It can continue to integrate itself into a North American and therefore U.S.A.-dominated free-trade area. Canada has done this and seen the share of manufacturing drop as part of its GDP. It seems to becoming a resource supplier again. Those industries that Canada does possess are totally integrated into the North-American market and are largely American-owned anyway. Mexico and Canada, in other words, can therefore be “hewers of wood and drawers of water”. The greater problem for Mexico is, however, that although it does have some minerals, its main natural resource is petroleum. That said, Mexico’s proven reserves are dropping, potential new wells in the Caribbean will be much more expensive to develop and will therefore require much more outside help and investment. Like most branch-plant economies, the funding is likely to come only in the form of ownership equity.
(Canada, by comparison, is much larger and has a much broader spread of natural resource ranging from fresh water to uranium. With huge oil sands on the eastern slope of the Rockies and the price of petroleum currently at $60 a barrel, Canada is much more of an oil/natural gas producing nation than Mexico; including the oil sands, Canada has now been rated as the country with the second largest amounts of proven oil reserves after Saudi Arabia. How Canada will deal with this when it is already totally integrated into the North American market remains open. Its population, albeit aging, is much smaller than Mexico’s. But Canada is, on the other hand, much more of an industrial, albeit a branch-plant, economy with the educational, technological, transport and communication infrastructure already at a relatively high standard.
Mexico, on the other hand, has nothing like the same amount of resources and its much larger population, half of it under the age of 25 years old, has to find an outlet for its energies. Large number of Mexico’s working equity, its young people, had for the U.S.A. But there are still lots of people at home looking for jobs.
posted by rjb @ Tuesday, February 14, 2006
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