This Game Is Over, Salvucci Sez

Ok. Right off the bat I lose 80 percent of my readers. That’s ok. I expect it. You aren’t missing much. All ten of you.

And if you were sort of hoping for personal yarns about experiences, good and bad, I’ve had in Mexico over 40 years, sorry. Not this time. Walking the streets in Roma Sur in Mexico City in my pajamas after a particularly wild party will have to wait. Besides, we were all young once. Even me.

Much more prosaic goal here. I’m trying to work out the last part of a revision of a book on the economic history of Mexico. This mostly concerns something that is not my strong suite, which is the twentieth century. That is exactly why I am writing this down. Nothing forces you to say what you think (or think about what you are saying) like writing. This is, frankly, an easier way to get some of my friends in Mexico to read this. Or not. No one has enough time to be looking at someone else’s work, and if someone does not, that’s just fine. I’ll take what I can get. I know damn right well that colleagues in Mexico know a Hell of a lot more than I do, so, I, at least, have nothing to lose. This is not an academic post. No one has refereed it or pointed out its many inadequacies. This is me, trying to think out loud about a series of problems that I have to simplify to grasp. You, if you are a reader, are a guinea pig, and I thank you. Seriously. Just let me hear from you.

The post is inspired by a recently published book, edited by Soledad Loaeza and Graciela Marquez (I’m gonna not worry too much about accent marks, ok–since WordPress is tough enough). It is called Raymond Vernon in 1963. Los dilemma de entonces y de ahora del desarrollo mexicano (El Colegio de Mexico, 2023). Boy, what an eye-opener for me. Where to begin? Well, the title means, more or less, Raymond Vernon in 1963. The Once and Present Dilemmas of Mexican Development. I’m not going to go into a long thing about Vernon (1913-1999) himself other than he had a long career in the private sector, the government, and in education, specifically, at Harvard Business School. He was not what we snottily call in the trade “a Mexicanist” which means he didn’t spend his life immersed in the minutiae of either Mexican history, business, or the economy. This alone earned him some very negative commentary in Mexico, including a famous review entitled “El Retorno de Quetzalcoatl.” (The “Return of Quetzalcoatl”) by a Mexican economist, and not just any economist, Ifigenia M de Navarrete. Ok.

The Quetzalcoatl, for the curious, is a reference to the plumed serpent Ur-deity of Middle America, who split for parts East after the usual fratricidal deity-battle beloved of the myth genre, but was widely expected to return and reclaim his rightful throne. Some enthusiasts will go as far as to claim that the leader of the Aztec empire, Moctecuzoma, thought that Cortes, the leader of the European party in 1519, was in fact the legendary Quetzalcoatl himself, which led to a certain ambivalence in how to treat the fair-skinned, bearded strangers, thus contributing to the demise of the Aztec state. Well, be that as it may, likening Ray Vernon to Quetzalcoatl was clearly nor intended by Sra. Navarrete, one of Mexico’s most eminent economists, a Harvard student herself, and a pioneering woman at Mexico’s National University, as a compliment. So, you get the picture: not everyone in Mexico was thrilled by Vernon’s opus, and said so.

But what exactly did Vernon say, and why should anyone care then, let alone now, sixty years later.

Do you believe in miracles? No? Not born Roman Catholic, obviously. I am fashionably, sniffily agnostic on the matter, as in “how can I, an educated person, believe in supernatural forces acting outside the scope of history?” But this isn’t the apparition of the Virgen of Guadalupe in 1531 we’re talking about. It was instead, a sustained period of rapid economic growth in a country whose growth history had exhibited few, if any such periods. Since this was realized, no less, under the guiding hand of a usually suspect Mexican government, well, if that wasn’t a miracle, what was? Even people there used the term “milagro (miracle).”

To put matters in perspective, I doubt that the average annual growth in nominal (i.e., not price-adjusted) GDP from 1820 through 1880 reached even one percent per year. But from 1954 through about 1976, (nominal) Mexican GDP grew at about 6 percent per year). Big difference, right. One way to think about it is to say, look, at the rate things were going in the earlier interval, it would have taken (at least) 150 years for the size of the economy to double. That’s, by standard accounting, about 5 generations. In the latter period, it would take about 12 years for the economy–basically the production of goods and services that people could consume or use to produce other goods–to double. That’s a decade, and people typically lived a lot longer in the latter period than in the former. In plain English (or Spanish), a person living in Mexico could go a long time–a lifetime–in the early period without seeing much if any economic change. Bluntly, live much better. Nor would that person’s children. By the 1960s, that was hardly the case. And people showed they sensed the difference by the way they behaved especially in the late 1960s. You are more or less talking the Middle Ages versus the Modern World. There are a lot of qualifications to this gross generalization, obviously. Lots and lots. But for our purposes, this is enough.

So what did Vernon say? Or what did he say to get himself compared to an invader who would divide and conquer what had been a prosperous indigenous world (another argument for another day, believe me). Simple. Vernon said it couldn’t last. Not without changing course dramatically. The miracle was, well, sort of smoke and mirrors. He didn’t say that, to be sure, but you could have read Vernon that way if you so desired. Hence the “dilemma” in the title of Vernon’s book. What to do? And, maybe just as importantly, why was he correct (or, as Ifigenia de Navarrete complained) dead wrong. Buckle up. This is not going to get technical or anything, but it does require some serious thought. And it may get a bit long. Sorry.

If you suffered through an econ course or two, you know that as economies grow (produce more goods and services), their structure (the composition of what they produce) changes. If people get richer–assuming they do as an economy grows (which isn’t inevitably true), their consumption changes. The conventional explanation is that as you get richer, you may change your diet or move into a nicer home. But you can only eat so much and only live in one place at a time. So the demand for food and shelter (and clothing) begins to lag behind the overall rate of growth. So, you answer, well, maybe I want to buy a car, assuming cars exist. Well, yeah, but how many cars can you drive at once? Even that has its limits. And somehow, in the process, somehow has to be building a car. Which, of course, requires, sheet metal. So you need some way or making that. And, oh, yeah, tools to shape the metal–I know, this is not very deep. Point is, there comes a time when people start to want industrial goods–of all kinds. Not just cars. How about sewing machines, if they exist? You can’t grow them in the backyard. Someone has got make them, preferably in a factory that turns them out cheaply and quickly. You expect to see a process of industrialization occur. And that is part of what we mean by modern economic growth. Not all of it, by any means. But if you get the impression people start to want a greater variety of more complex goods as income goes up, well, correct. You might even want someone else to grow your food and deliver it to your doorstep, but let’s leave services and commercial agriculture out for now. The argument in its essentials still holds.

At this point, the argument starts to get complicated, a little tricky, and, alas, ideological, not to say metaphysical (yes, metaphysical).

Suppose you’re happily farming away. You like farming. You are good at it. You can make money doing it (profits, yes, are central to the argument). How you gonna get a car? Well, you can build one. Yes, you can. If you are sufficiently skilled, you could build one, but then you’d have to give up farming. So how are you going to eat? Buy food! Oh. Suppose we rule that out for the moment? Well, I’ll go buy a car! Sure. Great idea. You’re a farmer. You sell your surplus crops for money. You save your pennies (or pesos) and go buy a car. You trade, basically. You specialize. Technically, you are now in a commercial society characterized by specialization and exchange, as well as by a market in which to trade. But the market doesn’t just appear like some weed. You need courts to enforce contracts, police to keep law and order, financiers to grease the transactions. A market economy is not a simple thing, even in itself.

To make matters worse, suppose you do “decide” to industrialize. Well, where do you start? You start by identifying the market for industrial goods–like cloth, for example, Where are you getting cloth if you’re not already making some of it at home. Well, look at your imports. There’s a bunch of things like cloth there, the products of what is termed “light industry.” The imports reveal the market. So all you have to do is replace the imports with stuff you make domestically. You engage in what is fancily termed import-substitution industrialization (ISI). If your country decides for any of a number of more or less persuasive reasons (there are dozens, ranging from the symbolic to the substantive), that’s where you start.

And that’s where Mexico started. Indeed Mexico started before the term ISI existed, in the 1830s. Strictly speaking, Mexico had industry even before then, because, as Adam Smith observed in The Wealth of Nations (1776), you can’t import everything you need. Ok? So we’re off. We’re going to pursue economic growth and modernization by ISI. And here’s where Ray Vernon came in.

Nothing, even the Universe, is forever. And, just as obviously, there are logical limits to the expansion of physical processes. Take road-building (the diagram is from a 2017 World Bank Research Paper). Over the 35 years from 1985 to 2016, the growth of the network of, for instance, divided highways (blue) and multilane divided highways (red) increased in absolute terms–Mexico added more and more. But unless they were intent (like Texas) in paving over the entire country, the rate of increase would have to slow down. Sooner of later, the potential for building roads that make sense is exhausted. No infant grows at the rate of a newborn forever: we don’t have brontosaurus-sized adults.

Well, think of ISI the same way. At some point, you suppose, you got all the textile industry you’re ever gonna want. How much cloth can anyone buy? And besides, you probably had to do something to limit imports from people who had already gotten the knack of manufacturing things like cottons, or shoes, or blue jeans and could do so cheaply. You

could license imports (you can only import things if you have permission), or you could tax them (called tariffs by the Econ), or you could place a bunch of silly regulations and rules that restricted imports of shoes to those made with Tanzanian leather (I dare you). They all have different effects, but they permit you to go about your business. You may or may not eventually get to do the thing as well as as some competitor (notice: we have suddenly introduced a world economy for the sake of making a point), but odds are it will cost you more in the beginning. You are less efficient, so you use more resources, or waste some, or just don’t organize as well. That’s life.

But someone has to pay the price. You think the manufacturer will? It could happen, but chances are you want to keep these people happy so they will keep producing and “creating good job” in producing “strategically important goods” which are “necessities.” So they got to make at least as much as they could doing anything else. Ah, but what about consumers or workers? Eeh….how much choice do they have? They pay a little more, or they do with something less durable or well made. The same jobs they work in are somewhat less remunerative because they end up consuming the higher priced goods they make. So they live a little less well. Or maybe a lot less well. The result depends on a lot of considerations. And maybe they have less to spend on other goods–because they have less to spend, period. So some other part of the economy cannot grow as quickly. It all has to come from somewhere and go somewhere.

Are you starting to get the picture (much, much oversimplified, to be sure)? For one thing, this is why most Econ trained in the Anglophone world are free traders at heart. They get this stuff pounded into them from the days of Econ 1. Now, you would also hope they’d get a lot of the serious ifs, ands, and buts about this story pounded into them as well, but don’t hold your breath. Especially in some institutions and rather large swathes of the country. There are a lot of devils in details (real or assumed, logical or otherwise), but we can’t argue about that now. At the very least, finding an economist trained in the United States who is some sort of unreconstructed advocate of restraints on trade–at least until the Trump administration managed to scare up a minyan–is not easy.

In part, this was a source of unease on Vernon’s part about ISI, although perhaps not a conspicuously large part, according to the terrific Mexican volume I’m looking at. There may have been more of a sense of “this can’t work indefinitely” in the first sense discussed, although even there, with the rate at which the population was growing in Mexico in the early 1960s, it is hard to believe that Vernon thought the internal Mexican market was going to stagnate all that soon. You know, the famous short versus long run–and we don’t worry much about the long run since most of us don’t think we’ll live to see it anyway (the most abused line from Keynes, maybe). Vernon surely knew that Mexico was in the midst of its “demographic transition” in the early 1960s, and that population growth wasn’t about to slow. And more subtly, there were large parts of the country where the adoption of “Western” style of dress was far from complete–part of being a mestizo nation (mixed race, basically) is that you don’t dress like an indigenous person. Believe me, in the mid-1970s, Mexico was in the midst of a polyester revolution that would have blown the plaid mind of Herb Tarleck on WKRP. Those polyester fabrics were made in Mexico.

So if we grant, at the simplest level, that Vernon could not have possibly thought the ISI model would soon prove unworkable for those economic reasons (there are plenty of others–complex ones involving finance and trade that I am simply ignoring), then whence the “dilemma?”

Again, I beg your indulgence for going on at length. I’ll try to be brief.

The other part of the dilemma was political, and to that I would add, agricultural. We have to discuss these together under the head of “agrarian reform,” which, admittedly does not make hearts go pitter pat. The Mexican volume really does not make much of agrarian reform, but it does fix on Vernon’s analysis of the Mexican political system. I suspect this is what got certain Mexican critics in such a snit. Nationalism aside, some of them were part and parcel–not to say creations–of the post-revolutionary Mexican regime. I can’t imagine they were too happy as being implicitly identified as part of a dilemma to be overcome if Mexico’s continued development were to be assured.

At the risk of another simple-minded generalization, Mexico underwent a violent and profound Revolution from 1910 to 1920 (more or less) which began with the overthrow of a long-standing regime and resulted in the slow reconstruction of another one that really continued into the 1940s. The thing that emerged in the 1940s ultimately lasted until the year 2000, when it was finally, peacefully (Vernon was dubious that the transition could be pacific) replaced. For simplicity, we can call the new regime the Mexico of the PRI (or Partido Revolucionario Institucional) or, less respectfully, what one observer called “the perfect dictatorship,” a stable, electorally based government democratic in form and with restricted participation in substance in which the major party (the PRI) controlled the presidency, state governorships, and most governments. Elections were free, even if they were not always fair, and by no means all of them were fixed. People struggled to classify Mexico and the PRI and generally settled on something awkward like “a multi-class integrative party with authoritarian characteristics.” The PRI worked by a pretty sophisticated combination of carrot and stick: cooptation, coercion, and, if necessary, repression. I always thought of it as a a kind of Latin machine that was open to aspiring entrants who implicitly promised not to rock the boat too much. If you played along, you got rewards that ranged from a tolerable, if not always easy existence–certainly for most far more than bare survival–to considerable personal wealth if you played the political system well, or navigated the waters of the private sector if you played by its rules (and the government’s). There was a free press (well, more or less) and more than the mere appearance of civil society.

If you chose to rock the boat, things could get tacky. In extreme cases, you could find yourself looking down the wrong end of a barrel of a gun, but it mostly did not come to that. Mexico was not, whatever anyone says a sort of police state light. Part of its success came from its ambiguity: if you went too far in trying to change the status quo, you generally found out too late that you had. So smart operators, and they were by no means dishonest, never tried to find out what “too far” meant. In most of Latin America, Mexico was considered an enviable success, and by 1970, whatever Raymond Vernon said, there were other gringos (the distinguished economist Clark Reynolds) who considered Mexico as successful example of what he called “indicative planning.” Mexico City was a cosmopolitan, intellectually vibrant place full of political exiles from elsewhere in the region. By contrast, Havana, the “real” revolution’s headquarters, was a morgue. My opinion.

So, what went wrong? Well, Vernon thought the system was too controlled and potentially too inflexible to accommodate its own material success. He thought that someone was going to have to loosen the reins eventually, because the success of the PRI–its material success in particular–would be its undoing. Ultimately, there were others in Mexico–my usual example is the intellectual Jose Woldenberg–who said much the same thing. You know, stuff we call a revolution of rising expectations in English–basically. Problem was, not just anyone was going to have to lose power and undergo considerable political alteration if the system that had crystallized (some would say, fossilized) under the PRI.

It was the PRI that was going to have to lose power.

The PRI was a machine that used the levers of the state and the economy to reward its friends and marginalize its enemies. For example, unions in Mexico were officially part of the PRI, as part of an umbrella group called the CTM or Confederation of Mexican Labor. The head of the CTM was for many years a “gentleman” named Fidel Velasquez who was a kingmaker whose political opinions and preferences could not be ignored–even as far as the level of presidential politics was concerned. In return for CTM support, official unions got a privileged position, generous non-cash benefits, a baseline wage settlement that you could not expect if you were not a part of the CTM. In return, you supported the PRI. You voted PRI. Quid pro quo. So the government could always try to keep control of labor costs and, hence, prices, by using the CTM. You can argue that the benefits to industrial workers in Mexico were relatively modest, but they were better than anyone else got or could get. You ended up as part of what is termed “the formal sector” in Mexico, and the benefits that came along with that were nothing to laugh at. Most jobs in Mexico today are not part of the “formal” sector” and their compensation is correspondingly meagre. A friend of mine once said, only half-jokingly–they pretend to pay us, and we pretend to work. I think he got that from the socialist economies, but never mind. Mexico was not socialist, believe me.

Now, in my view at least, the real Achilles heel of the postrevolutionary order, was agriculture. Bear with me. This won’t last much longer, I promise. I sort of saved the best for last.

Maybe not every orthodox economist (i.e., Anglophone, mostly) thinks that agriculture is the basis of economic development, but I haven’t talked to one lately who doesn’t (full disclosure: I do not frequently chat with economists anymore, which I am sure some will say is obvious from this post). You want it simple: first you have to eat. Then you attend to the rest. This appears to be rather elementary, but it is lost on many. When the late Nick Crafts published his book, British Economic Growth During the Industrial Revolution (1985), he managed to get this across to even the dullest of us. Rising agricultural productivity in Britain was the basis for an early, if gradual start to industrialization. Not everybody had to farm, so they could do something else. Like go off and work in a factory at a wage that would enable them to buy what they produced, and sell of the rest to those who stayed back on the farm and did nothing but farm (i.e., in a peasant society, they did not have to spin and weave and indeed, would not).

It really is too bad that Crafts was not around to teach students of Mexican economic history (let alone policy makers beginning in the 1910s) this lesson. Since so much of the Mexican Revolution was based in peasant and agrarian protest, there was no question that restoring peace was going to have to address this issue one way or another. In some cases, it was simple enough: return peasant lands that had been stolen by commercial producers (as in the state of Morelos) back to their rightful owners. This was the basis for what was called Zapatismo, or the leadership of the revolutionary Emiliano Zapata (1879-1919), in the state of Morelos, where the sugar planters had taken advantage of the rise of the price of sugar on the world market to expand their production: “progress,” as it was known. Progress, alas, hand an underside: the loss of peasant landholdings.

But in other parts of Mexico, the roots of the agrarian rebellion went deeper. Arguably they could be traced back to the early seventeenth century, when “Indian” villages had been created by the Spanish Crown for other purposes entirely. These need not concern us here, but their status was disturbed in the mid-nineteenth century, when a faction of the Mexican political world decided that “Indians”, villages, any sort of peasant landholding, was a drag on progress. This was not an ideology simply imported from abroad. One of the classic books in Mexican history, Los grandes problemas nacionales, said that small farmers–small mestizo farmers actually–were the answer to the large accumulations of land (haciendas) that the Spaniards had brought from medieval Europe that only led to an impoverished native peasantry who worked at the margins of the colonists’ agricultural economy on what land they could retain. It is a sort of stylized picture, obviously, but there was a large element of truth to it.

Starting in the mid 1910s, the revolutionary government tried to undo both what the Liberals and their land-grabbing ancestors did: to restore some version of the idealized Indian community, even if that community was really the product of late seventeenth century Spanish legislation. This redo was called “agrarian reform” and it involved breaking up large landed estates and restoring (in theory) previously community landholdings. There are, again, lots of variations, subtleties, reimaginings–just what you would expect revolutionaries who wanted to create some sort of agrarian tabula rasa from which to proceed. And to satisfy a sense of social justice and nationalism that deeply permeated the Revolution. Again, vastly oversimplifying, the Revolutionary and post-revolutionary governments, at first slowly, and then at a more rapid pace by the 1930s. The key institution in doing this was called an ejido. Ejidos were the common lands of colonial villages, sometimes waste, but they acquired a new meaning after the Revolution. They were state distributed lands that allowed the members of a community to work a grant of land (called a parcela) without actually owning it. The state continued to own the land via the ejido, but the members (and they were registered) of the ejido got the use of the parcela, and got to work it as if it was their own–except it wasn’t. Are you thoroughly confused? Good. You should be. And confused property rights are NEVER good for economic development. That is as near an axiom in mainstream economics as agriculture is the basis of everything else, and it separates the social democrats among us from the, er, flat out socialists, let alone communists. This is another one of those subtleties lost on most Americans, but at this point, not even the trained historians seem to do well in keeping the ideas straight. Anyway.

Now Vernon and his gifted recent expositors, Loaeza and Marquez, do acknowledge that Mexican agriculture was a problem by the early 1960s, although the ejido doesn’t seem to have been identified as a particular problem (In passing, some foreign observers called the ejido “Mexicos way out”–a positive assessment that I often think really meant that it combined the worst features of socialism and capitalism, but that is editorializing and more evident ex post). So, what was the big deal?

Not all Mexican agriculture was the ejido. And Mexican agricultural performance was by no means inevitably bad. Commercial agriculture in the North and Northwest, where land remained private and larger farms were the rule–supported by heavy government investment in irrigation–did well, and, at least until the 1970s, agricultural productivity was satisfactory–better, in fact. But at the same time, the relative productivity of the ejido between 1930 and 1960 fell by 20 percent. So the decent performance of commercial agriculture was held back by the ejido. So what was the purpose of “social property” as the Mexicans called it. Political, bluntly. The ejidos were part of a group called the CNC (Confederacion Nacional de Campesinos, or National Peasant Confederation). As one Mexican observer put it, Arturo Warman, they might not produce much but votes for the PRI, which they did consistently, So the ejido and the CNC, like the CTM, was part of the PRI machine, which meant the both agriculture and industry were guided as much by political necessity as they were by economic rationality or considerations of productivity. Until both showed real signs of imploding in the 1970s, at which the “miracle” was no longer quite so God-given.

When Vernon observed that restructuring the Mexican model (including ISI) meant that a lot of powerful interests would be affected, this is what he meant. Basically, it came down to the PRI as it had existed since (under various monikers and organizational forms) since 1929 was going to have to change and perhaps even disappear, because the the model of a directed economy within a relatively closed framework could not survive if the basis of a balanced macroeconomy did not exist. The ejido didn’t fit. Even the CTM didn’t fit if it meant limiting the purchasing power of labor. The internal market, even if growing, has to be able to purchase what it produces. Increasingly, starting in the late 1960s, government subsidies of all kinds began to make up the difference between demand and production. For a time, it looked like petroleum was going to come to the rescue–as an export, basically to buy food. There are, again, a lot of problems with such a construct–stuff that economists call the Dutch Disease that call for great care in what the Mexican President Lopez Portillo (1976-1982) termed “administering abundance.” Prudence was the last thing that characterized the use of oil revenue. And, surprise, oil prices can go down almost as fast as they go up, which is what happened in 1982. Suddenly Mexico was stuck with lots of borrowing to finance consumption and no way to repay it without pulling the rug out from nearly (not everyone), but nearly everyone. I remember the shocked looks on peoples’ face in 1982 as the extent of the economic disaster was becoming apparent. Technically, a fall in the value of the peso triggered it, but an earlier one in 1976 should have been a warning. Economic historians call all this the era of Bretton Woods or fixed exchange rates and modest flows of international capital. Mexico rode the wave up, and crashed along with it, compounded by its serious misjudgments and by the very flaws in the model that Quetzalco…..err, Raymond Vernon had identified. Never got too far ahead of your time. People will stab you in the back.

Ok, so what, you say? Why the Hell should some academic controversy of the 1960s litigated by a lot of folks no longer with us (Ifigenia Martinezde Navarrete is, actually, but Vernon isn’t) concern us? As my mentor, Stanley Stein used to pointed ask, “So what?”

Well, as Loaeza and Marquez quite astutely point out, the current president of Mexico is an avowed admirer of the period of the Miracle. And why not? For the last two decades, the growth in Mexican output has been about a third of what it had been in the 1960s. THat is a very big deal, and if you do not think that the breakdown in the rule of law in some parts of the country by the cartels narcos is not somehow related to drying up of economic opportunity of the more “normal” or conventional sort, I am going to have to disagree. If a kid can make a better living by running drugs through a border tunnel or getting across a river than by do it “the right way,” you really think that will have no tangible effect? You are far more optimistic about human nature than I am.