In the mid 1970s, the United States had added to its woes of recession those of inflation, due in considerable measure to
OPEC’s success in raising oil prices. To “whip inflation now,” the Federal Reserve Bank helmed by Chairman Paul Volcker began to raise interest rates, eventually driving the prime rate from 12 percent to 21 percent. By 1980, this had precipitated a far deeper downturn, which did lower inflation, but only by driving up unemployment to levels not seen since the Great Depression of the 1930s.
The recession Volcker engineered in the US had an even more devastating impact on Mexico, as the interest rate on rolling over its short term loans nearly doubled. By 1982, simply meeting interest payments would have required more than $8 billion per year. Worse, just as expenses soared, oil prices sagged. Mexico made clear it could no longer make its interest payments. US banks were terrified.
Thirteen of the biggest stood to collectively lose $60 billion if Mexico went under — 48 percent of their combined capital. And if Mexico fell, most of Latin America would come tumbling down behind it,
likely triggering a collapse of the entire international financial system. The United States, accordingly, put together a multi-billion-dollar package of loans and credits, and worked out an unofficial debt moratorium.
The World Bank and IMF were wheeled in to provide Mexico with emergency loans with which to resume paying the US banks, rescuing them from their own recklessness. These institutions in turn — following the model first worked out in New York’s
fiscal crisis in 1975 — now imposed “
structural adjustment” on Mexico. The creditors demanded privatization of public services, cuts in government social programs, a wider opening to foreign investment, and a ruthless concentration on paying back loans and interest. This arm-twisting was given an ideological gloss, reviving hoary shibboleths about the inherent superiority of market over state, repackaged as “neoliberalism.”
Executing these demands fell first to President de la Madrid and then to his successor Carlos Salinas de Gortari (1988–1994). Both believed the state apparatus was a burden upon Mexican business that should be thrown off, along with much else in the
Partido Revolucionario Institucional (PRI) inherited project and ideology. Structural adjustment prompted privatization, the opening of the country to foreign investment, and the reorientation of the agricultural sector towards exports. The 1980s were known as
la Década Perdida, or “lost decade,” wherein 800,000 jobs evaporated and dispossessed farmers streamed into urban centers.
