Introduction to the Economic Strategy of the 1970s in Mexico
During the early 1970s, Mexico experienced a period of economic success known as the “Desarrollo Estabilizador” strategy. This approach led to significant growth in productivity, employment, and real wages while maintaining inflation close to that of the United States. However, this success was short-lived as a new economic strategy, dubbed “Desarrollo Compartido,” replaced the previous one.
The Shift to Irresponsible Inflation
The “Desarrollo Compartido” strategy quickly devolved into irresponsible inflation, characterized by rising prices and worsening real wages. Simultaneously, fiscal discipline was neglected, resulting in an expanding current account deficit in the balance of payments. To finance this deficit, public external debt was rapidly accumulated, exacerbating the situation.
The most critical issue was the inherent conflict between fiscal and monetary expansionism and maintaining a fixed exchange rate. This ultimately led to a severe devaluation, drastically reducing the peso’s value from 12.50 to over 25 per dollar.
Voices of Caution and Prevention
Despite the looming devaluation and exponential growth in external debt, there were voices of caution. Secretary of Finance Hugo B. Margáin and later Ernesto Fernández Hurtado, the then-Governor of the Bank of Mexico, warned about the dangers of inevitable devaluation and the burgeoning external debt. Their efforts took place within the Banco de México’s Administrative Council, presided over by the Secretary of Finance since 1971.
Fernández Hurtado, with great didactic skill, explained how rising price pressures negatively impacted other indicators monitored by the council. As prices increased, bank intermediation deteriorated, balance of payments accounts worsened, and likely the Banco de Mexico’s international reserve positions diminished. These warnings fell on deaf ears, however, as José López Portillo, Margáin’s successor at the Finance Ministry, failed to comprehend or act on them.
Key Questions and Answers
- What was the initial economic strategy in Mexico during the early 1970s? The successful “Desarrollo Estabilizador” strategy focused on productivity, employment, and real wage growth while keeping inflation in line with the United States.
- What changes occurred in the economic strategy? The “Desarrollo Compartido” replaced the initial strategy, leading to unchecked inflation and a fixed exchange rate conflict with fiscal and monetary expansion.
- Who were the voices of caution during this period? Secretary of Finance Hugo B. Margáin and later Ernesto Fernández Hurtado, the Governor of the Bank of Mexico, raised concerns about devaluation and growing external debt.
- What were the consequences of ignoring these warnings? The irresponsible inflation resulted in severe devaluation, worsening real wages, and a rapidly expanding public external debt.
