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MEXICO is one of the few constitutional democracies with a rapidly expanding economy. In addition to the inevitable effects of rapid development on the life and habits of the Mexican people, it has resulted in a demand for ever new goals to be achieved. "Let's share alike in growth" has replaced the simple "Let's grow" as the call to work and to think. Thus, Mexico finds that, in order to achieve economic well-being with freedom and social justice, she still has much to learn, and a far greater incentive to learn it now.
Not long ago, this vast Mexican territory was considered to have little economic value or political importance. Many thought it merely a picturesque land which might as well be left to the sleepy villagers who had shown how easy it is to live and be happy on a nicely balanced diet of corn and beans. We know better now. Mexico has ceased to be merely the scene of an ancient civilization and has become one of the fastest growing economies in the world. The reason is clear. Mexicans have learned to work hard and not to depend on the tales of our past riches nor on the illusion of prosperity to be derived from other countries.
How did this revolution come about? The economic development of Mexico has its roots in the political Revolution of 1910, the first of similar twentieth-century movements in many parts of the world. Our present Constitution was drafted in 1917, although unrest continued until 1925. This profound social, political and economic movement produced the agrarian reform, which is one of the pillars of Mexico's agricultural and industrial development. The agrarian reform broke up the feudal structure of land-holding and agricultural production, changed attitudes towards work, and altered patterns of consumption and investment which were not in keeping with a progressive economy. The pre-Revolutionary pattern of self-contained, isolated units and absentee holdings provided little place for productive investment for increasing output on a commercial scale. The extreme poverty of the majority of the people and neglect of their needs contributed neither to human dignity nor to economic progress.
When the land was redistributed, modernization of the techniques of production became an immediate social and political objective. This involved large-scale irrigation, education, introduction of improved farming methods and use of agricultural machinery. These required large initial capital outlays and a system of production credits to the farmers.
Public works in irrigation began in 1926 and a number of institutions required by a growing economy were established immediately after the armed phase of the Revolution; the central bank, for example, was established in 1925. But not until the 1930s did agrarian reform take place on an extensive basis. In that decade the network of official credit institutions was formed (including the agricultural banks and Nacional Financiera, our development corporation). Road construction was intensified, public education spread and labor laws were enacted.
Parcelling of the large estates brought about increased productivity in agriculture, but it ultimately released additional manpower, swelling the reserves of under-employed, many of whom migrated to the cities. Furthermore, the particular vulnerability of the country's export position reflected extreme imbalance in production, and the overwhelming poverty bore proof of low productivity. These factors pointed to the need for industrialization as a means to increase production and real income for a population which grows 3 percent annually.
The fundamental aim of industrialization in Mexico is to achieve maximum utilization of all our human and natural resources. On these terms, the conflict between agricultural and industrial development has been resolved in practice on the basis of complementary and simultaneous (if not always orderly) development of both sectors, as well as tertiary activities. Nor have we neglected mining and other primary activities.
Agricultural progress has been necessary to provide food and textiles for our fast-growing population, to provide raw materials essential for industry and for export, so that we may acquire foreign exchange with which to import capital goods. Agricultural progress in turn has resulted in the establishment of new industries supplying the goods required to increase farm productivity. Improved agricultural production has also been necessary to raise the incomes of the rural population, still the most important segment numerically, thereby creating an expanding market for the new industries. At the same time, industrialization has been relieving the population pressure in rural areas by providing employment opportunities in the cities. Thus, growth in the two sectors has been complementary.
Agricultural progress has also meant producing in greater proportion for the market and the progressive reduction of the non-monetary subsistence sector (an important force for overcoming the cultural isolation of much of the people). Industrialization in turn has required an improved transportation network and a host of financial and distributive services. Thus, Mexico's economic development has been characterized by vigorous expansion of tertiary activities. Foreign trade and other international transactions have both contributed to, and in turn have been stimulated by, the rise in real income.
The year 1939 is usually thought of as the starting point of real industrial development in Mexico; the date is convenient because adequate statistical data has been available only since then. That year also marked the beginning of the Second World War, which was to have a favorable impact on the country's economic growth. By 1939, the groundwork for industrialization had been laid by the agrarian reform and the other institutional changes derived from the Revolution. A strong measure of internal political stability had been achieved and the agricultural and other public investments were beginning to yield fruit. The rapid industrial growth that followed spearheaded an almost unparalleled annual rise in real national output, averaging 7 percent a year.
In this brief span of less than 20 years, the annual volume of agricultural production has grown more than two and one half times as a result of the expansion in the area under cultivation, shifts to more productive crops and increased yields. Cultivated land has increased by one-third, to 50 million acres; and half of the nearly 8,000,000 acres which are now irrigated represents new land brought into cultivation. Large and small-scale irrigation, along with better seeds, fertilizers, pest control and use of agricultural machinery, have produced a revolution in the structure of our agricultural output as the counterpart of institutional agrarian reform.
Forty percent of our agricultural production at present consists of raw materials for industry. Cotton is now our number one crop in value (as well as our leading export), having overtaken the crop which for centuries formed the basis of our economy--corn. Cotton production has increased more than six times since 1939, reaching a peak of 2.2 million bales in 1955. We are now the world's second largest exporter of the fiber.
Mexico's second-ranking export product is coffee; output has expanded from 55,000 metric tons in 1939 to 93,000 in 1955, making us the third largest coffee producer in Latin America. The sugar cane harvest has tripled in the same period, reaching 14 million tons. New areas in the Northwest and the expanding cultivation in the tropical Southeast are producing cash fruit and vegetable crops. At the same time, Mexico's food staples have continued to grow. The corn crop is half again as large as output in 1939, wheat production has tripled to 1.2 million tons last year; rice has more than doubled in volume to 225,000 tons; and 470,000 tons of beans were harvested in 1956. The livestock industry has not progressed as satisfactorily, but output rose 13 percent last year, with poultry, egg and milk production making the best gains.
Agricultural progress has permitted reduction of food purchases from abroad at the same time that national consumption has risen. Our rapidly growing population still consumes over three times as much corn as wheat, but per capita consumption of the latter has been rising much faster since 1939, a clear indication of changes in eating habits that accompany improvements in living standards.
Not only is Mexico approaching self-sufficiency in the production of basic foods, but diversification and increased volume have converted our fields into important producers of foreign exchange. Agriculture supplied more than half the value of our merchandise exports last year. Progressive farming also generates demand for producers' goods and Mexico is a good dollar market for imports of agricultural machinery, trucks, breeding-stock and seeds, insecticides and fertilizers. This type of import contributes directly to increasing farm productivity, unlike the heavy imports of food which used to be necessary.
Industrial growth since 1939 has been particularly vigorous. The annual volume of manufactures has grown three and one half times, along with a tripling of electric energy generated and of petroleum and petroleum products.
The nationalized petroleum industry has steadily increased exploration and drilling, refining, pipeline distribution and proven reserves. Crude production has jumped from 43,300,000 barrels in 1939 to 94,100,000 last year, and the refining capacity of PEMEX is 250,000 barrels a day. Petroleum supplies 85 percent of the energy consumed in the country and most of Mexico's output is used nationally. Natural gas production averages 342 million cubic feet daily with capacity at 950 million daily.
The progress of PEMEX has made a major contribution to Mexico's economic development. As a public enterprise, the petroleum industry has made possible significant external economies for all types of industry through the provision of low-cost fuel, in much the same way as public works in irrigation and road building have been essential for new private investment and economic development. Internal and external market prospects have never been more favorable. PEMEX enjoys a considerable volume of medium-term credit from private banks and suppliers in the United States and Europe, but its chief problem, like that of other progressive industries in Mexico, is still the shortage of long-term capital needed to finance productive investment.
The sector of the economy experiencing the slowest growth since 1939 is mining, but important tax exemptions have recently been provided to encourage exploitation of lower grade minerals and investment in metal-producing plants. The exploitation of new minerals, such as sulphur and titanium, has also given the industry a lift. The increases in output attained in the last two years have brought annual mining output somewhat above the volume produced in 1939.
The most striking evidence of Mexico's economic development is provided by the progress in manufacturing. Before the Second World War, Mexican manufacturing was confined largely to textiles and food processing. Our present plants turn out an increasing proportion of producer goods, in addition to a wide variety of consumer goods, ranging from instant coffee and plastic gadgets to electric blenders and refrigerators. During the period 1950-56 manufacturing rose 62 percent in volume. Production of machinery grew by 121 percent, chemicals by 110 percent, cement and glass production doubled, iron and steel expanded by 92 percent and transport equipment by 78 percent.
The field of transportation has been particularly favored by public investment. At the end of the Revolution there were few highways and the antiquated railways constituted the principal means of passenger and cargo transport. Intensified road construction since the thirties has developed to the extent that the highways now carry more than half the volume of transport. Much has been done also to rehabilitate the railroads. Since 1939, almost half of all public investment has been in the field of transportation, including sea- and airports. Foreign long-term credits, from the Export-Import Bank, International Bank for Reconstruction and Development, and private U. S. banks and suppliers have made a significant contribution to the financing of highways and railroads. The national highway system has grown from 5,660 miles in 1939 to 21,130 miles today; and the number of motor vehicles registered in the country has expanded even faster, from 139,000 to 622,000. The country has 14,500 miles of railroads and 39 public airports.
It is not surprising that the rapid development of market agriculture and industry and the shrinkage of the non-monetary sector of the economy should have been accompanied by even greater expansion of trade and service industries, including an increasingly diversified financial system. Combined assets of Mexico's credit and insurance institutions at the end of last year amounted to 37 percent of monetary national income, compared to 25 percent in 1939. An important expansion took place last year in the operation of the private Mexico City Stock Exchange, housed in its fully-equipped new quarters, and during recent months three new investment companies were formed.
One of the most satisfactory aspects of Mexico's economic development has been the unusual degree of balance it has achieved. We have put our faith both in industrialization and in working effectively to increase agricultural production. Nevertheless, in a country that for centuries has been rooted to the soil, industry has surged ahead of agriculture in value of output. Industrial activities (manufacturing, mining, construction, petroleum and electricity) together contribute 29 percent of net domestic product, whereas agriculture, together with stock-raising, forestry and fishing, represents 24 percent. Trade accounts for 23 percent and other services for another 24 percent. It is also important that farmers and workers have increased their shares of the benefits of an expanding economy. In 1952, wages, salaries and supplementary payments to workers accounted for 22 percent of the net domestic product, and this figure rose to 32 percent in 1956. Earnings of farmers have increased from 15 percent of national income in 1952 to 18 percent in 1955.
Foreign trade and investment have traditionally been important elements in the Mexican economy. The rapid growth of recent years has increased both the absolute and relative importance of external transactions, yet there is a fundamental difference in their impact on the economy. Before the Revolution, foreign investment was the principal source of capital, but it encouraged production primarily for export and touched only isolated sectors of the economy. As a result of the Mexican Revolution and changes in the structure of world trade and investment since the First World War, foreign capital has come to play a supplementary rather than a primary rôle in the Mexican economy. Private capital formation within the country and the increased availability of public loan capital have provided the opportunity for more comprehensive economic development.
Nacional Financiera, the official industrial bank and development corporation, has provided vigorous financial support to private and mixed enterprises in basic industrial fields, such as iron and steel, petroleum, fertilizers and chemicals, whose importance for development and for strengthening internal demand may not be matched initially by their financial attractiveness to private investors. Financial support from Financiera takes a variety of forms. New enterprises promoted by it typically combine public and private participation in their capital stock, not infrequently including foreign capital. But Financiera does not usually exercise direct operating control, even when it has a majority interest. Successful enterprises initially supported by Financiera are later able to satisfy their financial needs through private banks and capital markets.
Nacional Financiera also operates as an investment company through the issuance of its participation certificates, and supports the development of the security markets, thus contributing to the formation of the savings and investment habits of the community, upon which the sound financing of economic development must rest.
The bulk of national investment, however, is carried out by the private sector, as the result of the favorable conditions created by the Government. In addition to benefiting from investments in basic economic development and from government financial support, private investment in Mexico enjoys many fiscal incentives. To begin with, taxes are low; Federal taxes still represent only 8.5 percent of gross national product, one of the smallest tax coefficients in the world. Important tax exemptions, or reductions, for periods of five to ten years, are granted under the law for promoting "new or necessary industries," in operation since 1939, as well as under the recently adopted law for promoting mining. Import tariffs provide protection to new industries, and duties are extremely low on entry of capital goods. Furthermore, the business income tax favors the reinvestment of profits and contains liberal depreciation, depletion and capital gains provisions. As a result, private investment has been growing faster than public, and now accounts for almost 70 percent of gross fixed investment. During the last two years private initiative accounted for almost all of the total increase in our capital formation.
Similarly, industrialization is correcting the former imbalance in production by developing manufactures for the home market. Our broader based economy and diversification of exports have reduced our vulnerability to external changes in demand at the same time that international transactions have increased in importance.
In the slow-moving pre-Revolutionary economy, exports served primarily to service foreign investments and to provide imports of consumer goods which did little to increase the real income of the overwhelmingly rural population. Today, however, exports finance those imports of capital goods required to increase investment, employment, productivity and real per capita income. For example, machinery and vehicles, together with tools, parts and construction materials, make up 45 percent of imports, in comparison with 24 percent in 1939. Other producer goods account for an additional 35 percent.
Mexico's international transactions amount annually to a $3 billion two-way business, most of it with the United States. Income from international transactions on current account has grown seven times in dollar terms since 1939--from $216 million in that year to $1,436 million in 1956. Expenditures have expanded eight times during the same period, from $181 million to $1,427 million. Mexico is one of the United States' best customers, absorbing $840 million in goods last year. Our share in United States' exports has doubled since the prewar period and our purchases have kept up with the substantial expansion of U. S. sales abroad during the last two years. Mexico's share in world trade also is higher than it was before the war.
Clearly our policy of importing on a selective basis is not designed to reduce imports below our ability to finance them, but simply to distribute our foreign exchange resources in a way that will contribute most to domestic productivity and external purchasing power. It is implemented by import permits required for certain goods and by differential import duties (with respect to products but not with respect to countries of origin). Our import duties are also intended to protect our young industries.
Our booming imports, and other foreign exchange needs, have been financed principally by growing exports and services, although direct private investment and development loans from abroad have made it possible to obtain critical capital goods. The proportion of agricultural products in our export trade has been growing, and now amounts to 55 percent of the total value of exports, compared to 28 percent in 1939. Meanwhile, the share of mining has declined from 65 percent to 29 percent. Since the end of the war, tourist income has become an important source of foreign exchange and now brings in half as much as we derive from all our exports.
Favorable internal and external conditions in recent years have permitted us to build up our dollar reserves to a level sufficient to finance imports over a five-month period at current high levels --an enviable exchange position. Moreover, the tremendous expansion of our international account has taken place under complete convertibility of the peso, and absolute freedom of exchange. Our international credit standing is at an all-time high, thanks to scrupulous fulfillment of obligations and promising growth potential.
Notwithstanding the enormous rate of population growth, real income per capita has nearly doubled during this brief period between 1939 and 1956. The Mexican economy has moved from dead center, and bears the potential for continued accelerated growth. As long as a rising portion of the annual increment in product is saved, increased investment will accelerate further growth, without reducing absolute per capita levels of consumption. This is roughly what has taken place in the Mexican economy since 1939, although not with perfect consistency, of course.
In terms of the labor force, economic development has meant rising productivity per worker in all sectors as well as a continuous shifting of workers to more productive enterprises. Farming, which absorbed 70 percent of the work force in 1930, today employs only 54 percent, yet during this interval agricultural production has increased 300 percent. Industry, which employs 16 percent of the work force, contributes 29 percent of the income generated.
The growth of industry, trade and services has brought about rapid urbanization, and 45 percent of the people now live in cities. Among the cities that doubled in population between 1940 and 1950 are Matamoros, in one of the new cotton-raising belts in the North; Culiacan, in the prosperous agricultural and industrial area of the Pacific North; and Nuevo Laredo, focal point for the growing trade with the United States. Our four largest cities--Mexico City, Guadalajara, Monterrey and Puebla--have grown more than 5 percent a year since 1940. Mexico City has boomed to 4,500,000 and is now the second largest city in Latin America, and fourth in the Hemisphere.
Among other changes relevant to economic development have been the extension of elementary education, reduction of illiteracy, expansion and improvement of advanced technical and professional training, including research facilities and substantial betterment of health and social security--all decisive factors for raising the quality of the people as producers. Of special significance has been the rise of a progressive middle class, whose attitudes and habits of work and saving and self-improvement are so important to an expanding market economy. Likewise Mexico is proud of its artists and scientists; Mexican painters and architects have long been leaders. Our University City, the Institute of Cardiology, the Institute of Nutriology, the Institute of Tropical Diseases, and the like, are but a few examples of the spirit of advancement that permeates Mexico today.
Of the many problems met with in our development, perhaps the most stubborn has been that of limiting the pressure on prices and on our exchange position produced by the high levels of investment. We may take some comfort, however, in the fact that our inflation did not reach the extremes suffered in other countries undergoing intense capitalization, and through it all, we have maintained complete freedom of exchange. The emergence of vigorous Mexican entrepreneurs, the response of the workers and farmers, the willingness of the people to save for the future, the dynamic contribution of know-how and capital from abroad, and favorable external factors--all these have helped to ease the inflationary pressure.
Like many other nations throughout the world, Mexico had to modify the exchange rate of its currency in 1949, in order to adjust the peso to postwar economic conditions. The new par value was fixed so as to strengthen the balance of payments as well as to prevent, to the greatest degree possible, an unleashing of inflationary pressures. Then came the Korean War; but the cutbacks after the cease-fire brought about a pronounced deterioration in our terms of trade. This, together with the 1953 recession in the United States and a sharp drop in dollar reserves, made a further devaluation imperative in April of 1954. Since that time, however, our monetary reserves have more than doubled. They have increased from $200 to $440 million, even though we have had to overcome several unfavorable demand and price developments during the last year and a half: a drop in cotton prices, caused by the export of U. S. surpluses at prices much below those paid to the American farmer; a reduction in metal prices, especially in lead and zinc; and a severe drought, which compelled us to import large quantities of corn in 1957.
We are now confident that our economy has passed the stage when we were forced to employ devaluation as the only means to correct a disequilibrium in our balance of payments without halting the development of the country. Henceforth, we shall obtain the same results by means of a wider and more effective mobilization of domestic savings, both public and private, and through sound fiscal and monetary policies. We now possess the resources and the determination to maintain a stable and free convertible currency.
Current tax receipts now represent the chief source of funds for public investment. The total public debt has declined relatively from a level representing 14 percent of national income in 1939 to 8 percent in 1956. During the last three years, despite increased expenditures and high rates of growth, we have enjoyed a Federal budget equilibrium, building up our dollar reserves substantially, and reducing considerably the rise of prices.
While maintaining financial stability, we naturally want to accelerate future development as much as possible. The absolute levels of income of the majority of the people are still depressed and at present rates of growth it will take many years to catch up even partially to standards of living in other countries. Great numbers of our people are unproductive, or not fully productive; only 34 percent of the population of 32,000,000 are gainfully occupied, and economic development has barely increased the work force in proportion to the total population (bringing about, rather, a shift to more productive occupations). A further increase in the investment ratio is required to furnish additional productive employment and to strengthen the purchasing power of the great majority.
There is a positive rôle for foreign capital in this growth potential, just as there has been in the recent economic development of Mexico. Long-term credits amounting to $570 million have been supplied principally by the Export-Import Bank, the International Bank for Reconstruction and Development, and during recent years by a number of private banks and suppliers in the United States and Europe. Of these, $256 million have been amortized, and $58 million paid in interest charges. The servicing of these strategic credits has been moderate, averaging less than 3 percent of foreign exchange income on current account since 1942, when this type of operation was initiated, or only slightly higher than the servicing of our old public debt (2 percent) which has had no counterpart in current investment during this period. As the old "dead" debt is paid off, our capacity to service new active development credits will increase.
The servicing of direct private investments has been somewhat heavier, averaging about 7 percent of income on current account since 1939. New investments amounting to approximately $680 million have flowed into the economy in this period, most of it from the United States, and profit and other remittances have totalled $890 million.
The dynamic quality of direct private investments, of course, has had a much more important impact on our development, bringing production and employment in new fields and generating new income and exports. Permanent benefit to the economy also has been derived from the new techniques introduced in production, organization and marketing and from the training of local personnel.
We would like to see an increase in these mutually beneficial relations which provide opportunity for legitimate profit on the one hand, and contribute to raising our standards of living on the other. We believe the formula which best suits these objectives is the joint participation of foreign and Mexican capital, private or public, for we have had very satisfactory results with this combination. We would also like our investors from abroad to sink their roots more deeply into the Mexican community--by plowing back profits, training national workers and technicians, and understanding our problems and ideals.
On the other hand, the investment needs of the country are vast, and cannot be met entirely by private capital. Some of our most pressing investment requirements lie in the public sector and include transportation, electric energy and petroleum expansion.
Mexico is ready to accept, to the fullest extent possible, the coöperation of the United States, and of other countries, for its economic development, but final responsibility can lie only on our shoulders. Mexico will certainly do its best to ensure that our development program is conducted in an atmosphere of friendliness to other nations and with benefit to all.