Mexico - Recovery and Relapse, 1976 82

Recovery and relapse, 1976-82

President López Portillo was inaugurated on December 1, 1976, amid a political and economic crisis inherited from the previous administration. A rising foreign debt and inflation rate, a 55 percent currency devaluation, and a general climate of economic uncertainty that had spurred capital flight plagued the economy. The new administration also faced a general lack of confidence in government institutions. Unexpected help arrived as a result of the confirmation of the large oil reserves. The Mexican government chose to follow a policy of increasing oil production only gradually to prevent an inflationary spiral that would disrupt economic recovery. Nevertheless, by 1981 Mexico had become the fourth largest producer of oil in the world, its production having tripled between 1976 and 1982. While production increased, so did the price per barrel of crude oil.

López Portillo left office in 1982 a discredited figure, in no small part because the press publicized accounts of his luxurious lifestyle. The Mexican public, long-suffering and pragmatic in political matters, found López Portillo's calls for "sacrifice" and austerity unacceptable when contrasted with his own lifestyle.

As in so many developing countries, oil did not solve all of Mexico's problems, however. The oil industry grew rapidly but could not employ the ever-increasing ranks of the unskilled. Oil made Mexico a rich nation in which a majority of the people continued to live in poverty. Foreign banks and the international lending agencies, seeing Mexico as a secure investment with abundant energy resources, flooded the country with loans that kept the peso overvalued.

"The Crisis", 1982

Although its effects rippled through every aspect of national life, the roots of what came to be known simply as "the crisis" were exclusively economic. The roots of the crisis lay in the oil boom of the late 1970s. Oil prices rose sharply at a time when oil exploration in Mexico was at a peak. The nation found itself awash in petrodollars. Its infrastructure, barely adequate before the boom, was overwhelmed by the influx of imported goods that followed Mexico's rising foreign exchange reserves and the overvalued peso. López Portillo promised "to transform nonrenewable resources into renewable wealth." In other words, he vowed to invest substantial amounts of the new oil revenue in areas and projects that would establish sustainable economic growth. This promise went unfulfilled.

The immense revenues generated by oil exports during the administration of López Portillo gave Mexico a greater degree of confidence in international affairs, particularly in its ever important relations with the United States. The government, for example, refused to participate in the United States-led boycott of the 1980 Summer Olympic Games in Moscow. When the two countries could not agree on the price of natural gas, Mexico flared its excess resources rather than sell to the United States below its asking price. Also in defiance of United States wishes, Mexico recognized the Farabundo Martí National Liberation Front rebels in El Salvador as a representative political force. These steps occurred although the United States remained Mexico's major oil customer and its major source of investment capital (see Petroleum, ch. 3; Foreign Relations, ch. 4).

Government spending did increase substantially following the oil boom. Little, if any, of the new spending, however, qualified as productive investment. Food subsidies, long a political necessity in Mexico, accounted for the largest single portion of the new spending. Although impossible to quantify, many accounts agree that the level of graft and corruption skyrocketed. The new money fueled a level of inflation never before seen in modern Mexico; the inflation rate eventually surpassed 100 percent annually. The López Portillo administration chose to ignore warning signs of inflation and opted instead to increase spending.

The macroeconomic trends that preceded the crisis also displayed warning signs that went unheeded. Oil income rose from 1979 to 1980. Oil exports began to crowd out other exports; the petroleum sector accounted for 45 percent of total exports in 1979, but dominated exports with 65.4 percent of the total in the second quarter of 1980. Like so many other developing nations, Mexico became a single-commodity exporter. With almost 50 billion barrels in proven reserves serving as collateral, Mexico also became a major international borrower. Significant foreign borrowing began under President Echeverría, but it soared under López Portillo. Foreign banks proved just as shortsighted as the Mexican government, approving large loans in the belief that oil revenue expansion would continue over the terms of the loans, assuring repayment. Hydrocarbon earnings for the period from 1977 to 1982, US$48 billion, were almost matched by public-sector external borrowing over the same period, which totaled US$40 billion. By 1982 almost 45 percent of export earnings went to service the country's external debt.

Living standards had already begun to decline when the oil glut hit in 1981. Although the economy grew by an average of 6 percent per year from 1977 to 1979, purchasing power over that period dropped by 6.5 percent. By mid-1981, overproduction had softened the international oil market considerably. In July the government announced that it needed to borrow US$1.2 billion to compensate for lost oil revenue. The month before, Pemex had reduced its sales price for crude oil on the international market by US$4 per barrel. Continued high import levels and the drop in oil exports had boosted Mexico's current account deficit to US$10 billion. This uncertain situation--high external debt, stagnant exports, and a devalued currency as of February 1982--prompted investors to pull their money out of Mexico and seek safer havens abroad. This action, in turn, led López Portillo to nationalize the banks in September 1982 in an effort to staunch wounds that were largely of his own making.

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