Institutional Revolutionary Party - The Economic Crisis

The Economic Crisis

The government of Luis Echeverría (1970–76), secretary of interior during the Díaz Ordaz administration, increased social spending, through external debt, at a time when oil production and prices were surging. However, the growth of the economy came accompanied by inflation and then by a plummeting of oil prices and increases in interest rates. Investment started fleeing the country and the peso became overvalued, to prevent a devaluation and further fleeing of investments, the Bank of Mexico borrowed 360 million dollars from the Federal Reserve with the promise of stabilizing the economy. External debt reached the level of $25 billion dollars. Unable to contain the fleeing of dollars, Echeverría allowed the peso to float for the first time on August 31, 1976, then again later and the peso lost half of its value. Echeverría designated José López Portillo, his secretary of Finance, as his successor for the term 1976-82, hoping that the new administration would have a tighter control on inflation and to preserve political unity.

During his campaign, López Portillo promised to defend the peso "like a dog", López Portillo refused to devalue the currency saying "The president who devalues, devalues himself." The discovery of significant oil sites in Tabasco and Campeche helped the economy to recover and López Portillo promised to "administer the abundance". The development of the promising oil industry was financed through external debt which reached 59 billion dollars (compared to 25 billion during Echeverría). Oil production increased from 94,000 barrels per day (14,900 m3/d) at the beginning of his administration to 1,500,000 barrels per day (240,000 m3/d) at the end of his administration and Mexico became the fourth largest oil producer in the world. The price for a barrel of oil also increased from three dollars in 1970 to 35 dollars in 1981.

The government attempted to develop heavy industry. However, waste became the rule as centralized resource allocation and distribution systems were accompanied by inefficiently located factories incurring high transport costs.

Mexico increased its international presence during López Portillo: in addition to becoming the world's fourth oil exporter, Mexico restarted relations with the post Franco-Spain in 1977, allowed Pope John Paul II to visit Mexico, welcomed American president Jimmy Carter and broke relations with Somoza and supported the Sandinista National Liberation Front in its rebellion against the United States supported government. López Portillo also proposed the Plan Mundial de Energéticos in 1979 and summoned a North-South World Summit in Cancún in 1981 to seek solutions to social problems. In 1979, the PRI founded the COPPPAL, the Permanent Conference of Political Parties of Latin America and the Caribbean, an organization created "to defend democracy and all lawful political institutions and to support their development and improvement to strengthen the principle of self determination of the peoples of Latin America and the Caribbean".

López Portillo also freed political prisoners and proposed a reform called Ley Federal de Organizaciones Políticas y Procesos Electorales which gave official registry to opposition groups such as the Partido Demócrata Mexicano and the Partido Comunista Mexicano. This law also created positions in the lower chamber of congress for opposition parties through proportionality of votes, relative majority, uninominal and plurinominal. As a result 1979 saw the first independent (non-PRI) communist deputies in the Congress of Mexico.

Social programs were also created through the Alliance for Production, Global Development Plan, el COPLAMAR, Mexican Nourishing System, to attain independency on food, to reform public administration. López Portillo also created the secretaries of Programming and Budgeting, Agriculture and Water Resources, Industrial Support, Fisheries and Human Settlements and Public Works. Mexico then obtained high economic growth, a recuperation of salaries and an increase in spending on education and infrastructure. This way, social and regional inequalities started to diminish.

All this prosperity ended when the over-supply of oil in early 1982 caused oil prices to plummet and damaged severely the national economy. Interest rates skyrocketed in 1981 and external debt reached 86 billion dollars and exchange rates went from 26 to 70 pesos per dollar and inflation of 100%. This situation became so desperate that Lopez-Portillo ordered the suspension on payments of external debt and the nationalization of the banking industry in 1982 consistent with the Socialist goals of the PRI. Capital fled Mexico at a rate never seen before in history. The Mexican government provided subsidies to staple food products and rail travel; this diminished the consequences of the crises on the populace. Job growth stagnated and millions of people migrate North to escape the economic stagnation. López Portillo's reputation plummeted and his character became the butt of jokes from the press.

The attempted industrialization had not been responsive to consumer needs. Therefore, unprecedented urbanization and overcrowding followed and so, substandard pre-fabricated apartment blocs had to be built in large cities.

Miguel de la Madrid was the first of a series of economists to rule the country, a technocrat who started to implement neoliberal reforms, causing the number of state-owned industries to decline from 1155 to a mere 412. After the 1982 default, crisis lenders were unwilling to loan Mexico and this resulted in currency devaluations to finance spending. An earthquake in September 1985, in which his administration was criticised for its slow and clumsy reaction, added more woe to the problems. As a result of the crisis, black markets supplied by goods stolen from the public sector appeared. Galloping inflation continued to plague the country, hitting a record high in 1987 at 159.2%.