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Political Capital: Mexican Financial Policy under Salinas

Published online by Cambridge University Press:  13 June 2011

Timothy P. Kessler
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Abstract

Market reform is advocated in developing countries to improve economic efficiency and prevent privileged groups from obtaining rents from the policy-making process. Yet this prescription fails to address the complex political process that governments are likely to confront when moving toward the market. This study shows how political considerations during President Salinas's administration distorted economic reform in Mexico.

During the 1990s Mexican finance policy contradicted the government's declared neoliberal principles. While the banks were reprivatized and deregulated, they were also given a high degree of protection from competition, enabling the new owners to charge excessive interest rates. In addition, the government artificially inflated the value of the currency through exchange-rate intervention. These contradictory policies are best understood as a coherent political response to the electoral vulnerability of the ruling party (PRl) at the end of the 1980s. When viable political opposition threatened the PRl's ability to maintain power, it responded by using financial policies to distribute economic benefits to social groups, particularly business, the middle class, and the poor, whose support was critical for electoral victory.

Type
Research Article
Information
World Politics , Volume 51 , Issue 1 , October 1998 , pp. 36 - 66
Copyright
Copyright © Trustees of Princeton University 1998

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40 No single U.S. or Canadian banking subsidiary could initially gain a market share larger than 1.5 percent of the total capital. Furthermore, the combined total of all foreign banks could not exceed 8 percent of net capital until the year 2000, after which the ceiling would be raised to 15 percent. By 2004 the banking sector was to be completely liberalized; however, a safeguard clause allowed the Mexican government to extend a grace period to the market share ceiling until 2007 if foreign bank penetration reached 25 percent. See , Paul et al. , North American Free Trade Agreement: Summary and Analysis (New York: Matthew Bender, 1993), 67–72Google Scholar. Following the 1994 peso crisis Zedillo raised market share ceilings in order to provide foreign capital for local and regional banks facing insolvency.

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69 These obstacles were later overcome by outrage and insolvency. In 1995 a national debtors' movement called El Barzón, including hundreds of thousands of consumers, businessmen, and farmers, faced real interest rates of 40 to 50 percent and threatened a moratorium on loan payments until there was some serious relief from the high rates.

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77 A month before the 1994 election, PRD candidate Cuauhtemoc Cardenas promised that his administration would pressure the banks to lower interest rates. However, when asked to openly support a greater opening to foreign banks, he declined. El Financiero (June 12,1994), 45.

78 Author's interview, Mexico City, March 10,1995.

79 Carlos Salinas de Gotari, “Economic Highlights of the Sixth Annual Presidential Report,” Mercado de Valores (January-February 1995), 13.

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88 Fear of inflation following moderate U.S. growth led the Federal Reserve to almost double interest rates in 1994, from 3 percent to 5.5 percent. For a discussion of the effect of U.S. interest rates on emerging markets, see Ahmed, Masood and Goopta, Sudarshan, “Portfolio Investment Flows to Developing Countries,” Finance and Development (1993), 11Google Scholar.

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100 Patricia Nelson “PECE with the Peso,” Mexico Business News (June 1990), A7.

101 The National Industrial Chamber, the Confederation of Industrial Associations, and the National Council of Foreign Commerce all supported the maintenance of the peg through 1994. See El Financiero (November 16,1994), 28; La Jornada (August 31,1994), 43; El Norte (April 3,1993).

102 Part of the government's justification for maintaining the peg was to avoid price increases on imported machinery and inputs. See El Financiero (November 25,1991), 87. While exporting maquiladoras have long imported virtually all inputs, the domestic non-maquila sector also relied increasingly on intermediate goods from abroad. From 1989 to 1993, while Mexican non-maquila exports rose 31.9 percent, from $22.8 billion to $30 billion, non-maquila imports rose by an astonishing 109 percent, from $23.4 billion to $48.9 billion. See ElInversionista Mexicano (August 29,1994).

103 El Economista (April 14,1994), 48.

104 See Te'an, Chen, “Lessons from Financial Crisis in Southeast Asia,” Beijing Review 40 (September 29, 1997)Google Scholar; Brian Bremner and Joyce Barnathan, “Who's Really Pounding Asian Economies?” Business Week (September 22,1997), 52; “Lessons for Thailand, et al.” Economist (July 12,1997), 16. For a more formal analysis of the regulatory causes of the Asian crash, see Paul Krugman, “What Happened to Asia?” (http://web.mit.edu/krugman/www/DISINTER.html).

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