Monetary Mismanagement and Inadvertent Democratization in Technocratic Mexico.

Theories about the emergence of democracy in the developing world, both within Western policy-making circles and in the academic community, continue to be dominated by the traditional concepts of modernization theory. From this perspective, economic development is an essential, even if not sufficient, ingredient for the development of democratic politics, and a capitalist market economy is the most effective means of generating economic advancement (Lipset, 1959, 1994; Rostow, 1971; Huntington, 1991; Przeworski, 1991; Ruescheimer, Stephens and Stephens, 1992; Weintraub and Baer, 1992; Diamond, 1989). Economic policies which favor the free operation of markets would help generate economic advancement, produce social differentiation, encourage liberal individualism, and thereby strengthen the foundation for democratic politics in developing countries. Underlying this argument is the implicit assumption that liberal democracy will tend to reinforce economic liberalism and thus long-term economic growth. Expandi ng individual liberties in one realm will inevitably encourage citizens to demand equivalent freedoms in the other. This inherent compatibility between political and economic reform thus has the power to create a virtuous circle of democracy and development in developing countries (Packenham, 1973; Shattuck and Atwood, 1998).

This line of thinking is anything but unchallenged. An opposing school of thought argues that political and economic liberalization are necessarily incompatible--not only does economic reform, and market-based economic policies more generally, undermine democracy (Waisman, forthcoming; Acuna and Smith, 1994; O'Donnell, 1994), but democracy also threatens the implementation of economic reform as well as the effective functioning of markets (Olsen, 1982; Przeworski, 1991). Democratic practices increase the capacity of individuals to punish politicians who implement policies which damage their interests. Under these circumstances, politicians will have an incentive to avoid politically costly economic reforms, to rely on non-democratic means to achieve their economic objectives, and/or to respond to the demands of powerful actors rather than preserve the efficient functioning of the economy.

The battle for supremacy between these two schools of thought persists largely because there is a large body of empirical evidence supporting each perspective. Numerous case studies identify a long-term relationship between higher levels of economic development and democracy, in both developed and developing countries, showing that in some instances, economic and political reform can be highly compatible. A growing number of empirical studies, however, indicate that the opposite is often true. This theoretic conundrum has spawned a third school of thought which accepts that although political and economic reform can be reinforcing, they also can be highly contradictory. More important, these two reform processes often interact in surprising and often ambiguous ways. These analysts argue that the link between democracy and market economics is not simple and unidirectional but complex, dynamic and driven by factors whose significance has been overlooked by many analysts (Conaghan and Malloy, 1994; Geddes, 1994 ; Nelson, 1994; Haggard and Kaufman, 1995; Oxhorn and Starr, 1999).

The complicated and potentially ambiguous relationship between political and economic liberalization is evident in the case of Mexico. A cursory glance at Mexican political and economic development in the post-war period seems to paint a portrait of modernization at work. Fifty years ago, Mexico was a largely agrarian country with an authoritarian political structure. In the ensuing years, rapid development transformed Mexico into a middle-income country based on a growing manufacturing sector and an increasingly differentiated economy. Until the debt crisis of the 1980s, this development process was directed through extensive state involvement in the economy. Beginning in the mid-1980s, however, Mexico implemented a series of market-based economic reforms to reduce the traditionally centralized, hierarchical, and paternal characteristics of the Mexican economy and thereby increase its efficiency. As the role of the market increased, Mexico gradually emerged from its debt-induced economic crisis.

This process of economic development in Mexico has been neatly correlated with a gradual process of democratization. Beginning in 1978, the Mexican government instituted a series of electoral reforms which, very gradually at first and quite rapidly from 1989 onward, pushed Mexico toward an expansion of democratic practices, including opposition control of the lower house of the national legislature beginning in September 1997. It would thus appear that economic advancement based on capitalist development and later market reform pushed forward democratization in Mexico.

Within this neat story of modernization, however, one can also find evidence of political and economic reforms not only undermining one another but also operating in quite unanticipated ways. A controlled yet significant expansion of democratic practices during the Salinas administration (1989-1994) was designed both to open the political space needed to implement economic reforms and to block the construction of full democracy in Mexico. Although successful in these tasks, limited democratic reform also helped obstruct the effective management of Mexico's expanding market economy which led to the late 1994 peso crisis. During the ensuing administration of Ernesto Zedillo, government efforts to consolidate market-based reforms initially opened the door to an expansion of Mexico's budding democracy. This same policy objective, however, later created incentives for the government to attempt to restrain the scope of democratic practices. Further, when the consolidation of economic reform did promote democracy, it did so in a way predicted neither by modernization theorists nor their critics. This outcome was not the consequence of free markets initiating a virtuous cycle of improving living standards and expanded democracy but instead the consequence of an economic crisis.

That an economic crisis would help undermine the legitimacy of the established government and thereby promote political reform is clearly not surprising. This relationship is actually one of the very few aspects of the link between political and economic reform on which most analysts agree. Rather, the surprise is found in the precise sequence of events in the Mexican case. An expansion of democracy helped usher in an economic crisis which created a political environment initially conducive, but later inimical, to the expansion of democracy. This article will analyze these surprising characteristics of political and economic reform in Mexico during the 1994-1998 period to illuminate the ambiguity which often pervades the link between economic and political liberalization and thereby help advance our understanding of the logic behind this theoretically confounding complexity.

The story begins with the efforts of the Mexican government to ensure the political survival in the wake of limited democratic reforms. In advance of the 1994 presidential elections, it manipulated monetary policy to improve its electoral chances. Although successful politically, this strategy carried with it a great economic risk--it deepened existing instabilities in the Mexican economy which ultimately culminated in the devaluation of December 1994. The ensuing economic crisis generated deep public disgust with both the market reforms perceived to be responsible for the crisis and the ruling party which had instituted these reforms. To preserve both social stability and market reforms in the midst of a sharp and thus very costly stabilization program, the new government offered the public a series of palliatives including democratic reforms.

The effective institution of these democratic palliatives, however, was far from guaranteed. The government of Ernesto Zedillo was forced to undertake a sort of balancing act. It needed to gain the support of the political opposition to implement democratic reforms, yet it also faced substantial and growing opposition within its own party to this political-economic strategy. Although the government was convinced that its economic program could not be sustained without public acquiescence, it also knew that this program could not be implemented without the cooperation of the ruling party. The hard-won compromise, achieved after a year and a half of on and off negotiations and unilaterally modified at the last minute by the ruling party, was not designed to construct a construct a real democratic opening in Mexico. Quite to the contrary, its aim was merely to buy the political space needed to carry out needed economic reforms. Nevertheless, the electoral reforms instituted to preserve Mexico's market-based eco nomic program ushered in an opposition majority in the lower house of the Mexican legislature.

Attuned to the public's anger at market reforms and interested both in exerting and expanding its new-found political influence, the opposition soon initiated a legislative effort to alter Mexico's neoliberal economic program by proposing modifications to the 1998 federal budget. Although these efforts were unsuccessful, the government encountered surprising difficulty in assuring the opposition votes required to approve its budget proposal, and soon thereafter it faced a surprisingly strong backlash from within his own party in opposition to the political-economic strategy upon which the budget accord was based. These developments raised serious doubts about the government's ability to protect Zedillo's economic project from the inevitable political/legislative onslaught it would face as the 2000 presidential elections approached. The Zedillo Administration acted to limit the scope of democracy's reach and thereby contain the threat it might pose to market reform. It proposed to expand both the economic pol icy prerogatives and the autonomy of a Central Bank dominated by Zedillo's appointees and led by the president's closest economic policy adviser. If approved, these reforms will place a large portion of macroeconomic policy decision-making beyond the reach of elected politicians and place it in the hands of an institution dedicated to preserving Zedillo's market-based economic project.

Political Instability, Monetary Mismanagement, and the Devaluation of 1994

An environment of economic crisis and political illegitimacy greeted Carlos Salinas upon receipt of the presidential sash in December 1988. The previous seven years had been characterized by crisis, inflation, stagnation, and a sharp deterioration in Mexican living standards. This period had also culminated in the stock market crash of October 1997, price increases verging on hyperinflation, and a renewed stabilization effort which drug the economy back into recession. The inability of the government to extract Mexico from this devastating cycle of economic stagnation and crisis, combined with its strikingly inept response to the 1985 earthquakes, severely eroded public confidence. Between 1983 and 1987, the percentage of the population which felt that the government was doing a good job fell from 45 percent to 29 percent (Basanez 1990: 100). On election day in July 1988, Mexicans made their dissatisfaction known--Salinas garnered the lowest vote percentage ever for any presidential candidate of the ruling I nstitutional Revolutionary Party (PRI). Further, although Salinas was accorded 50.4 percent of the vote, this result was widely seen to be fraudulent. Its veracity was marred by an inexplicable collapse of the electoral commission's computer system which delayed the announcement of the final vote tally for a week. The questionable character of these election results gave rise to months of opposition-led protests and relentless questions about the legitimacy of the Salinas government.

Carlos Salinas took office lacking the legitimacy to govern yet with plans to implement a dramatic deepening of the market-based reforms he had initiated as planning minister during the previous administration. Salinas' first challenge was thus to build the political legitimacy essential for carrying out such a radical reform of the Mexican economy. To this end, Salinas quickly responded to the core complaint registered by a majority of Mexicans--those who had voted for opposition candidates calling for the expansion of democracy in Mexico. In his inaugural address, Salinas promised Mexicans that he would "seek an opening in our democratic life," [1] and the following month he opened discussions with the opposition which culminated in a limited reform of Mexico's electoral system (irregularities in the 1991 mid-term elections led to a second phase of reforms approved in 1993). [2] The Salinas government also recognized an increasing number of electoral victories by candidates from the opposition National Act ion Party (PAN). Most notably, Salinas accepted the victories of PAN candidates in gubernatorial elections for the first time in more than half a century. Although each of these reforms increased the fairness of Mexican elections, they were never intended to democratize Mexico. Their aim was to placate a public dissatisfied with PRI governance and to forge a strategic alliance with the PAN to ensure legislative approval of Salinas' economic reforms--the 1988 elections had deprived the PRI of the 2/3 legislative majority required to amend the constitution--and thereby to enable the implementation of economic reform while preserving the political dominance of the ruling party.

Salinas' strategy of limited political reform coupled with radical economic reform worked quite well in the short term. By mid-1991 the economy was growing again (growth averaged 3.8%, 1989-1991), inflation was on the wane (from 159% in 1987 to 19% in 1991 to 7% in 1994), and electoral reform combined with a few important opposition victories had created the perception of expanding, even if very far from complete, democratic practices. [3] The effectiveness of this approach to rebuilding the legitimacy of PRI governance is visible in the results from the 1991 mid-term elections--the PRI increased its percentage of the vote for the lower house of congress from 49 percent in 1988 to 61.5 percent and recaptured the 2/3 majority it had lost three years earlier. [4]

The economic growth which formed an essential element of the Salinas strategy of governance, however, was both limited and unevenly distributed throughout the economy. Although some sectors and firms flourished in the new economic environment, many others, including those responsible for the majority of employment in the economy, struggled to survive. Further, three years of moderate growth was simply not enough to overcome the costs associated with nearly a decade of recession. For the majority of Mexicans, therefore, by the close of 1991 the Salinas reforms had produced only a small improvement in their living standards. These reforms had, however, dramatically altered their expectations. Although most Mexicans had not yet personally felt the benefits of a revived economy, they expected that their turn would come soon. Good times, they believed, were just around the corner. [5]

The survival of this positive outlook and the support it produced for the Salinas project required continued economic growth, yet growth fell off sharply in 1992 and 1993. Growth fell to 2.8 percent in 1992 (below the 3.4% rate required to create enough jobs to employ new entrants into the job market) and measured only 1 percent in 1993, owing mostly to a government effort to cool the economy in response to a yawning current account deficit (spawned in part by the overvalued currency used to fight inflation). [6] This is not what the Mexican population had been promised. The Salinas administration had repeatedly assured Mexicans that the sacrifices associated with restructuring the economy would lead to high growth and improved living standards. Further, the administration's electoral success in 1991 was due in large measure to its success building support in urban areas (a sector of the population where the PRI is traditionally weak) based on the promise of improved economic conditions. The economic slowdow n directly threatened these votes. As the economy weakened, the owners of small and medium-sized businesses and the broader urban middle class began to express their dissatisfaction with the government and its economic policies. [7] Salinas thus needed to reestablish economic growth to prevent these voters from defecting to the opposition.

Given these circumstances, it is not surprising that the government abandoned its effort to reduce the country's current account deficit by restricting domestic economic activity. In September 1993, the government announced a series of modifications to …