Financialization in Mexico - Dr. Gregorio Vidal
268 JOURNAL OF POST KEYNESIAN ECONOMICS budget. Additionally, as a result years of IMF-led structural reform, the fiscal responsibility law was approved, obliging governments to maintain balanced budgets (Vidal, 2008). As this second and decisive phase of the financialization of the Mexican economy came to a close, its true meaning for the country’s economy was made resoundingly clear. We can summarize several of the most important processes in this period as follows: 1. The successive reforms and financial opening led to active financial operations by the largest domestic firms, where their sales, operations, and investment strategies were administered under the parameters of profitability obtained in financial markets. 2. The privatization of social security placed the constant flow of workers’ salaries at the disposition of financial markets. 3. The domination of foreign banks in the domestic markets has permitted an orderly outflow of capital from what has become a subsidiary economy that outwardly transfers income flows in a financialized fashion (Figure 2). 4. Financial reform and the fiscal responsibility law have fully eliminated the ability to exercise fiscal and monetary policy, as well as credit regulation, leaving the government without the most important instruments of economic policy. Driven by the financial crisis of 1994–95 and its resolution, this second stage of financialization represented the consolidation of the financialized accumulation regime, with all of the particular aspects of a developing economy. The economic and financial crisis during the first years of the twenty-first century affirmed the consequences that this type of crisis could generate in a financialized developing economy: prolonged economic stagnation as a result of an inability to execute countercyclical policies; procyclical capital flight; reductions in employment, salaries, and nonfinancial public spending; lower levels of external and internal credit; and a slow and feeble recovery. We can situate the third phase of financialization in Mexico as beginning approximately at the start of the cycle of economic growth from 2004 to 2007. This third stage can be characterized by the domination of foreign-owned banks, which consolidated their market share in 2002 at around 80 to 85 percent (measured in assets) going forward, and by the use of public assets (particularly public service networks) and growing portions of public expenditures to pay for financial rent. This conversion has been achieved both through the privatization of networks and companies and the granting of contracts for the private exploitation of
FINANCIALIzATION IN MEXICO: TRAJECTORY AND LIMITS 269 Figure 2 TNC profits and interest paid on public and private debt (per year) Billions of Dollars 25 20 15 10 5 Source: Banco de México (2010b). TNC Profits Interest Paid on Public and Private Debt 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 public networks. This aspect of the Mexican economy merely reflects global tendencies as financial and nonfinancial companies, primarily from the United States and United Kingdom, have rolled out a similar strategy at the global level (Vidal, 2004, 2009b). As financial rent continues to be transferred abroad, internal credit follows a clear downward path. At the onset of the financial crisis in 1994, the domestic private banking sector channeled credit equivalent to 34 percent of GDP to private sector activities. In mid-2010, this proportion had fallen to 7 percent (Banco de México, 2010c; Instituto Nacional de Estadística y Geografía [INEGI], 2010a). Once again, Mexico found itself on the front line of the collapse of a financial bubble, this time driven by structured finance. Foreign-owned banks, which are at the heart of the global financial system, have provided a powerful procyclical force, both by cutting credit lines and repatriating growing amounts of profit. At the same time, many of the largest domestic firms, unable to find competitive funding at home and pursuing aggressive management of cash flows through structured products purchased from international banks, also found themselves poorly placed by the financial crisis.