ABSTRACT
From 1940 to 1981 Mexico experienced spectacular economic growth, with its gross domestic product (GDP) expanding in real terms at a speed that outpaced that of the United States of America (US), its powerful neighbour. In those four decades, in spite of its rapid demographic expansion, Mexico cut down nearly ten percentage points in the gap of its GDP per capita vis-à-vis the US. From being equivalent to 22 per cent of the US average in 1939, Mexico’s GDP per capita climbed to represent 30 per cent of the US figure in 1981, measured in constant dollars (Maddison, 1995). However, the evolution of the Mexican economy since 1982 has been plagued
by stagnation and instability. Upswings in economic activity, though moderate by historic standards, have been recurrently interrupted by balance of payments crisis. The result has been a dismal performance in terms of economic growth. Real GDP declined in 1982-87, and averaged an annual increase of just 2.4 per cent in 1988-97, more than four points below its average in 1950-75 (see Table 18.1). Such sluggishbehaviour pushedback its catching-upprocesswith theUSeconomy. By 1997, Mexican GDP per capita in constant dollars represented approximately 24 per cent of the US, a relative gap similar to the one prevailing nearly sixty years ago. Sustaining high long-term economic growth should be a top priority in the
national agenda. The economy needs to expand at least at 6 per cent per year in real terms, just to create the jobs required by the 3.3 per cent annual increase in its labour force.1 Economic expansion must be even stronger in order to significantly improve the living standards of the tens ofmillions ofMexicans that live in extreme poverty.2 If the economy does not soon enter a path of high and sustained growth, the nation’s social fabric may be severely damaged. In the last ten years, economic growth has again became a fashionable topic
for academic research, originating a vast literature on the, so-called, New Growth theory. This theory differs from the conventional one, based on Solow’s seminal
contributions, in claims regarding, inter alia, the convergence of levels of real incomeper capita and the impact of the savings rate on long-termeconomic growth. However, both theories identify technical progress and the supply of factors of production as the main determinants of long-term economic growth. Notwithstanding their valuable contributions, their focus on the supply side
fails to recognize the influence of financial constraints and of aggregate demand on economic growth (Skott and Auerbach, 1995; Taylor, 1996). This neglect questions their relevance for the analysis of growth processes in developing economies, whose fixed capital formation strongly depends on importedmachinery and equipment. Such dependence implies that access to foreign exchange tends to be a relevant constraint on fixed investment and, therefore, on economic growth. In fact, the experience of the Mexican economy, and many other countries in Latin America, is a dramatic proof that apparently sound economic growth trajectories can be derailed by sudden changes in the availability of foreign exchange. Shocks in the terms of trade or in the net inflow of foreign capital have radically altered the growth path of many economies in the region. The availability of foreign exchange is recognized as a key determinant of
long-term economic growth by some, non-neoclassical, analytical perspectives. “Two Gap” Models, rooted in the work of Chenery, and the balance of payments constraintmodels (BPC-model hereafter), extendingHarrod’swork on the foreigntrade multiplier, are examples of these perspectives. Some of their tools have gained acceptance as useful instruments to analyse economic growth processes when markets do not necessarily clear (Taylor, 1996). The chapter covers four sections besides this introduction. The section, “The
balance of payments constraint: an analytical model”, puts forward a revised version of the balance of payments constraint model to include a notion of long-term equilibrium that guarantees a positive and sustainable path of external indebtedness. The section, “Balance of payments constrained growth in Mexico”, applies this version of the BPC-model to explain main turning points in Mexico’s economic growth path since 1950. The last section summarizes the conclusions.
