Country Study 7

By the time Mexico declared a suspension of debt service payments in August 1982, it had already begun a process of external adjustment that was to prove in the short run outstandingly successful compared with that of other countries, but was based on a total collapse of domestic investment and imports of capital goods. In 1983, imports fell by 42 per cent and GDP by 5 per cent.The drastic effects of this depression on living standards are self-evident: by 1984 the purchasing power of the average wage was little more than half its level in the late 1970s. The country's total wage bill plunged by 32 per cent from 1982 to 1984.The recession went far beyond what was necessary to meet the external debt problem. In 1984, when domestic aggregate demand fell short of supply by some 17 per cent, only 6 per cent was required for the transfer of real resources abroad as a result of the debt crisis. The rest was attributable to the depression and provides one measure of the waste of resources involved.Even this level of demand reduction did not, however, deal with the inflationary problem - indeed, inflation accelerated to over 100 per cent in 1984. Dr. Nora Lustig and Dr. Jaime Ros argue that this was not surprising, as these policies were based on an erroneous model of inflation. In fact inflation is not very sensitive to demand restraint; by contrast, the nominal fiscal deficit is, however, highly sensitive to inflation. Thus the attempt to achieve a pre-determined fiscal target by cutting real government investment and social expenditure led to a recession that was much deeper than planned, leaving inflation well above the planned level.The mild recovery in 1984-85 soon ran into renewed payments difficulties as non-oil exports failed to respond as much as hoped to the maxi-devaluation. This failure, reflecting again the use of wrong-headed economic models, led directly to the payments crisis of mid-1985, a new policy package and a new recession - all worsened by the collapse of the oil price in 1986.These policies caused a reduction of some 10 per cent of GDP, between 20 per cent and 30 per cent of investment, and 30-35 per cent in real wages in 1985 compared with what would have been the levels under more sensible economic policies - not to mention the more enduring loss due to the once-for-all destruction of productive capacity. If one wants to find an example of negative structural adjustment, one need look no further than Mexico.