Sustinere, Volume 1 (2021), No. 1, pp. 85-97

Wasted Potential: The Underdevelopment of Extractive and Labour Industries in Mexico and South Africa

ISABEL DAVIS

International development strategies have been highly contested by policymakers and scholars alike. To this day, governments around the world are faced with the task of choosing policies that will ensure their countries economic development needs are met. In this paper, I give an overview of an economic policy that was popularized in the 1990’s by International Financial Institutions based in the United States, Neoliberalism. In particular, I examine how neoliberal economic policies have impacted Mexico and South Africa, two countries whose abundance in natural resources give them the potential for economic prosperity. However, I find that this is not the case. Neoliberal trade and fiscal policies in both countries resulted in stagnant economic development alongside an increase in wealth inequalities rather than an increase in economic growth and employment. I find that many factors shaped this outcome, such as problematic trade dependency, weak state institutions and a lack of economic policies that directly targeted industries whose productive capacity decreased due to liberalization. Therefore, I present the argument that neoliberalism harmed the sustainable development of both Mexico and South Africa’s economy. To this day, the two states have yet to reach the growth rate neoliberal economic policy promised them. Davis 86

INTRODUCTION In 2020, both Mexico and South Africa were categorized by the UN as “developing” nations, despite decades of economic reforms.1 In the 1990s, the two countries had strong extractive industries, specifically mining, which is said to grant the potential to stimulate widespread economic development if managed properly.2 However, economic development has stagnated in both countries. In South Africa, structural challenges and weak growth has made it difficult to reduce poverty levels and raise GDP.3 Similarly in Mexico, the economic growth rate averaged just a bit above 2% a year between 1980 and 2018, which has limited its development compared to other high-income countries.4 The following comparative analysis will examine whether this stagnation was due to similar shortcomings in the economic development strategies imposed by both countries. It is acknowledged that neoliberal policies can affect each industrial sector differently. For this reason, I chose to center my analysis on extractive and labour industries in both countries. I argue that in Mexico and South Africa, the neoliberal economic development strategies of the 1990s resulted in economic underdevelopment, since trade liberalization forged a relationship of external dependency in the extractive industries, and fiscal adjustment policies in labour industries increased wealth inequalities rather than improving the real economy through GDP growth and employment. In both countries, trade liberalization and a lack of state accountability resulted in the exploitation of extractive industries which lowered Mexican wages and made Mexico import dependent. In addition, fiscal adjustment policies in labour

1 “World Situations and Prospects,” United Nations, last accessed December 10, 2020, https://www.un.org/development/desa/dpad/wpcontent/uploads/sites/45/WESP2020_Annex.pdf.

2 “Extractive Industries,” The World Bank, last modified April 16, 2020, https://www.worldbank.org/en/topic/extractiveindustries/overview.

3 “The World Bank in South Africa,” The World Bank, last modified October 10, 2019, https:// www.worldbank.org/en/country/southafrica/overview#:~:text=The%20South%20 African%20economy%20grew,little%20room%20to%20reduce%20poverty.

4 “Mexico Overview,” The World Bank, accessed May 31, 2021, https://www.worldbank.org/en/ country/mexico/overview. Davis 87 industries worsened wealth inequalities rather than supporting those who had lost their jobs in non-competitive sectors. Perhaps, if both governments had been more accountable to their citizens through the creation of economic opportunities, both countries may not have had such drastic economic underdevelopment.

EXTRACTIVE INDUSTRIES AND TRADE LIBERALIZATION The impact of trade liberalization on Mexico in the 1990s resulted in a relationship of labour exploitation and export-dependency with the United States (US) and Canada in its extractive industries sector. Firstly, the centralization of industrial power in the hands of multinational corporations lowered wages and decreased employment opportunities for Mexicans. Although Mexico had been implementing neoliberalism since the 1970s, it fully ratified the North American Free Trade Agreement (NAFTA) in 1994 as a conditionality to an International Monetary Fund (IMF) bailout loan due to the 1994 Peso crisis.5 Consequently, Mexico adopted a set of trade liberalization conditions such as the removal of tariffs, quotas, and subsidies.6 However, these conditions only increased the ability of multinational corporations to dominate and impose their own ‘rules.’ In this sense, NAFTA negotiations favoured large firm owners. which lends no surprise to the fact that Mexico became a labour export platform to profit off low wages.7 The result was a 26% decrease in the minimum wage from 1994-2004.8 Consequently, NAFTA forced the Mexican economy to become increasingly reliant on its exports and foreign investments which limited Mexico’s ability to stimulate its own industrial capacity, making it reliant on external economies. Since Mexico’s largest trading partner was the US, the Mexican economy became

5 Cristina Laurell, “Three Decades of Neoliberalism in Mexico: The Destruction of Society,” International Journal of Health Services 45, no. 2 (2015): 251.

6 Nora Lustig, “Life is not Easy: Mexico’s Quest for Stability and Growth,” The Journal of Economic Perspectives 15, no.1 (2001): 97.

7 Cristina Laurell, “Three Decades of Neoliberalism in Mexico: The Destruction of Society.”: 252 ; Strom C. Thacker, “NAFTA Coalitions and the Political Viability of Neoliberalism in Mexico,” Journal of Interamerican Studies and World Affairs 41, no. 2 (1999): 68.

8 Cristina Laurell, “Three Decades of Neoliberalism in Mexico: The Destruction of Society,” 258. Davis 88 extremely susceptible to external shocks. Mexico has achieved some economic growth since the ratification of NAFTA. However, its economic growth and decline correlates directly with that of the US and it is increasingly dependent on imported inputs.9 This signals that Mexico’s economy is completely dependent on that of the US. Instead of fostering sustainable economic growth and employment opportunities, trade liberalization in Mexico has only exacerbated a relationship of import dependency with the US while simultaneously lowering wages for Mexican workers. The 1990s policy of neoliberal trade liberalization in South Africa also resulted in the exploitation of the extractive industries sector by multinational corporations, which resulted in a decrease in employment opportunities and import dependency. In 1996, the South African government came out with its strategy: Growth, Employment, and Redistribution (GEAR).10 Through GEAR, the South African government touted its commitment to trade liberalization since the common belief was that for South Africa to grow its GDP, it needed to have a fast-growing manufacturing sector to gain revenue from exports.11 However, much like in Mexico’s case, trade liberalization only further centralized power into the hands of multinational corporations. Many mining industries moved their financial operations abroad while multinational corporations asserted control over local subsidiaries.12 In addition, global conglomerates would use South Africa’s natural resources to produce other goods externally and reap the benefits.13 Similar to Mexico, the control of industry by multinational corporations resulted in exploitative labour practices such as a decrease in wages. The average wage

9 Laurell, “Three Decades of Neoliberalism in Mexico,” 258; Penelope Pacheco- Lopez, “The Effect of Trade Liberalization on Exports, Imports, the Balance of Trade, and Growth: The Case of Mexico,” Journal of Post Keynesian Economics 27, no. 4 (2005): 597.

10 Paul Williams and Ian Taylor, “Neoliberalism and the Political Economy of the ‘New’ South Africa,” New Political Economy 5, no. 1 (2000): 30.

11 D. Mahadea, “The fiscal system and objectives of GEAR in South Africa: Consistent or conflicting?," South African Journal of Economic and Management Sciences 1, no. 3 (1998): 451.

12 Neva Seidman Makgetla, “The Post-Apartheid Economy,” Review of African Political Economy 31, no.100 (2004): 275.

13 Nancy L. Clark, “Structured Inequality: Historical Realities of the Post-Apartheid Economy,” Ufahamu: Journal of the African Activist Association 38, no.1 (2014): 114. Davis 89 in South Africa dropped tremendously between the period of 1996-2004.14 Instead of South Africa benefitting from its extractive industries, it lost full control of them. This made their economy dependent on exports for growth and imports for inputs, which only stimulated low-wage economic opportunities for its citizens. In addition, the removal of tariffs due to trade liberalization harmed South Africa’s industrialization prospects because it made South African industries less competitive on the global market. GEAR ended subsidies on production and reduced import tariffs, which forced South African producers to increase productivity.15 Even non-extractive industries were impacted. For example, the clothing and textile industry could not afford to compete with cheaper imports, which resulted in job loss and import dependency.16 From 1994-2002, unemployment in South Africa climbed from 10.5% to 16.5%.17 At the same time, the government’s goal of growing GDP through manufactured exports failed. In fact, the opposite took place. South Africa became increasingly import dependent since its manufacturing exports were not competitive on the global market. Overall, this had adverse impacts on the availability of economic opportunities in the country.

COMPARISON OF TRADE LIBERALIZATION OF EXTRACTIVE INDUSTRIES In both Mexico and South Africa, neoliberal trade liberalization of extractive industries in the 1990s led to exploitative labour practices and import dependency. Although Mexico has since been successful in economic diversification, it still had a trade deficit in 2004.18 Neoliberalism states that the aim of trade liberalization, specifically the removal of import tariffs, is to encourage export promotion, which is

14 Neva Seidman Makgetla, “The Post-Apartheid Economy,” 265.

15 Makgetla, “The Post-Apartheid Economy,” 267.

16 Sagie Narsiah, “Neoliberalism and Privatisation in South Africa,” GeoJournal 57, no. ½ (2002): 35.

17 Makgetla, “The Post-Apartheid Economy,” 264.

18 “Mexico Trade Summary 2004 Data,” The World Bank, accessed December 10, 2020, https:// wits.worldbank.org/CountryProfile/en/Country/MEX/Year/2004/Summary. Davis 90 then predicted to result in an equal revenue from both import and export competing industries.19 However, the removal of import tariffs in both Mexico and South Africa only made them increasingly import dependent and resulted in the loss of employment in newly non-productive sectors. The governments of both countries did not consider how neoliberal economic policies would further fragment society leading to underdevelopment in the real economy. One factor at play is the lack of strong state institutions in both Mexico and South Africa during the 1990s, which left little room to incentivize the fostering of sustainable economic opportunities for its citizens. Both the African National Congress in South Africa and the Institutional Revolution Party in Mexico, which were in power in the 1990s, have been accused of economic mismanagement, including corruption.20 Arguably, the adverse impacts of trade liberalization on citizens could have been mitigated if both governments’ state institutions had been strong enough to foster alternative economic opportunities for industries adversely impacted by the reduction of import tariffs. Instead, due to a lack of state accountability, high unemployment rates and import dependence characterized neoliberal trade liberalization in Mexico and South Africa. Neither government ensured that the benefits of trade were spread equally and that workers who lost their jobs would be protected in a social security net. If the government had stepped in and distributed financial support to offset the losses of trade sustainable development could have been possible with trade liberalization. Instead, the lack of government support led to the inability of neoliberal trade liberalization to harness growth in the real economy nor promote sustainable development.

19 John Williamson, “What Washington Means by Policy Reform,” In Latin American Adjustment: How Much has Happened?, edited by John Williamson (Washington: Institute for International Economics, 1990).

20 Robert Basseling, “The Slow Demise of ANC: Political change, economic decline and state corruption in South Africa,” Egmont Institute, no.18 (2016): 2.; Louise Shelley, “Corruption and Organized Crime in Mexico in the Post-PRI Transition”. Journal of Contemporary Criminal Justice 17, no.3: 218. Davis 91

LABOUR INDUSTRIES AND FISCAL CONSTRAINT In addition, the reduction of the Mexican government’s expenditures in labour industries as a neoliberal fiscal adjustment policy in the 1990s, exacerbated wealth inequalities, leading to the underdevelopment of the real economy. In order to reduce the government expenditure, the Mexican government embarked on the denationalization of the agriculture industry which was reliant on labour. The privatization of the agricultural sector was a gradual process that started prior to NAFTA’s ratification in 1994 and continued after.21 In 1992, the government strengthened private property rights by modifying Article 27 of their constitution, which allowed public agricultural lands to be privatized.22 The privatization of the agricultural sector resulted in a decline in agricultural output growth from 3.2% in 1960-1980 to 1.6% from 1990-2001.23 Despite Mexico successfully reducing their budget deficit, there was little financial support from the government to help those who had lost their jobs from the denationalization of agricultural enterprises.24 The result was a large gap in the wealth distribution that favoured wealthier farmers since poorer farmers that relied on state support lost their financing due to the reduction in the government’s expenditure. Despite the Mexican government’s aim to reduce their expenditure, the government implemented a poverty-reduction strategy in the latter period of the 1990’s. Their poverty reduction strategy, PROGRESA, began implementation in 1995. 25 However, there were no social security nets that dealt specifically with the external shocks to agriculture.26 Consequently, many small farmers had difficulty accessing the necessary credit to diversify and compete with larger

21 Juan Pablo Arroyo Ortiz, “The establishment of Neoliberalism in Mexico,” PSL Quarterly Review 72, no.289 (2019):181.

22 Juan Pablo Arroyo Ortiz, “The establishment of Neoliberalism in Mexico,” 181.

23 Ortiz, “The establishment of Neoliberalism in Mexico,”181.

24 Nora Lustig, “Life is not Easy: Mexico’s Quest for Stability and Growth.” The Journal of Economic Perspectives 15, no.1 (2001): 89.

25 Nora Lustig, “Life is not Easy: Mexico’s Quest for Stability and Growth,” 89.

26 Lustig, 101. Davis 92 farms.27 The government’s agricultural fiscal adjustment policies did achieve the goal of a reduced budget deficit. However, this came at the expense of a widescale loss of employment in a labour industry which lowered growth rates in the agricultural sector. The South African government also applied fiscal adjustment policies in the form of a reduction in government expenditure in labour industries in order to minimize their budget deficit in the 1990s. However, in South Africa, the reduction of government expenditure exacerbated pre-existing structural inequalities. In 1994, the country had just come out of apartheid, which meant that there were pre-existing racial structural inequalities in place, especially in labour.28 Instead of addressing these inequalities as previously stated in the Reconstruction and Development Plan, the South African government opted for neoliberal fiscal adjustment strategies.29 The government’s economic development plan, GEAR, was committed to reducing the budget deficit and believed that all the stimulus needed to provide GDP growth should come from private investment rather than government spending.30 However, this proved to be inadequate. Private sector investment decreased rather than increased while state enterprises were sold off.31 Since most Black South Africans worked in labour, the denationalization of labour industries, such as agriculture, had a disproportionate impact on them.32 Due to the fiscal adjustment, many Black South Africans were without work since private companies needed to cut workers in order to be more productive and competitive. The loss of jobs, predominantly among the Black working class, only further exacerbated the structural economic inequalities that existed due to apartheid. Unlike in Mexico, poverty-reduction strategies were only aimed at improving living conditions, not

27 Lustig, 101.

28 Paul Williams and Ian Taylor, “Neoliberalism and the Political Economy of the ‘New’ South Africa,” 27.

29 Neva Seidman Makgetla, “The Post-Apartheid Economy,” 270.

30 J. Weeks, Commentary. Stuck in low GEAR? Macroeconomic Policy in South Africa, 1996-98,” Cambridge Journal of Economics 23, no.6 (1999): 800.

31 Sagie Narsiah, “Neoliberalism and Privatisation in South Africa,” 32.

32 Paul Williams and Ian Taylor, “Neoliberalism and the Political Economy of the ‘New’ South Africa,” 27. Davis 93 fostering economic opportunities during the period of neoliberal reforms.33 The South African government achieved a reduction in their budget deficit, however, the lack of support for those who lost their jobs due to fiscal adjustment measures led to inefficient economic development in the real economy.34

COMPARISON OF FISCAL CONSTRAINT IN LABOUR INDUSTRIES Since the implementation of fiscal adjustment policies in labour industries in both Mexico and South Africa, both countries have lost economic opportunities as denationalization proved unsuccessful in the real economy. Although both countries were successful in financially reducing their deficit, the main factor that led to underdevelopment was the fact that denationalization did not result in increased growth or employment opportunities in either case. Since the implementation of neoliberal economic policies in the 1990s, Mexico’s average GDP growth rate has only been stagnant at 2%, whereas South Africa has had an average GDP growth rate of 3.1% since the implementation of neoliberal reforms.35 However, this is far below the amount their government aimed for with GEAR.36 In addition, fiscal adjustment policies resulted in an exacerbation of pre-existing inequalities due to a loss of opportunities for economic participation. The lack of social safety nets played a huge role in how the persistence of these inequalities. In South Africa, there were no government programs to encourage re-training for individuals who had lost their jobs during the period of reform. Contrastingly, in Mexico, PROGRESA focused on involving more individuals in the economy through encouraging economic empowerment, which seemed to lessen

33 Neva Seidman Makgetla, “The Post-Apartheid Economy,” 263.

34 “General government deficit (indicator),” Organisation for Economic Co-operation and Development, accessed December 10, 2020, https://data.oecd.org/gga/general-government- deficit.htm.

35 “The World Bank In Mexico,” The World Bank, last modified October 9, 2020, https:// www.worldbank.org/en/country/mexico/overview; “South African Economy: An overview of key trends since 1994,” Industrial Development Cooperation, last modified December 2013. https:// www.idc.co.za/wp-content/uploads/2018/11/IDC-RI-publication-Overview-of-key-trends-in-SA- economy-since-1994.pdf.

36 D. Mahadea, “The fiscal system and objectives of GEAR in South Africa: Consistent or conflicting?," 449. Davis 94 the cost of inequalities. From 1994-2004, Mexico’s Gini index declined whereas South Africa’s only grew.37

CONCLUSION This paper has examined the impact of neoliberal policies in both Mexico and South Africa in an attempt to understand the roots of their underdevelopment. I acknowledge that the scope of this paper only accounts for the impact of neoliberal trade policy on extractive industries and fiscal policies on labour industries. However, I believe that both analyses provide insight into commonalities between both countries, such as the necessity of ensuring external economies do not gain too much control over extractive industries, as well the necessity of a social security net for those left behind by trade and the most vulnerable populations that are harmed by fiscal constraint. I argued that in Mexico and South Africa, the neoliberal trade and fiscal economic development strategies of the 1990s resulted in economic underdevelopment. This is because trade liberalization in extractive industries forged a relationship of external dependency, and fiscal adjustment policies in labour industries increased wealth inequalities rather than improving the real economy through GDP growth and employment. Both Mexico and South Africa’s economic development has been stagnant since the implementation of their neoliberal reforms. This can only lead one to question whether neoliberalism inherently impedes economic development due to its overemphasis on markets rather than fostering economic opportunities for people.

37 Juan Pablo Arroyo Ortiz, “The establishment of Neoliberalism in Mexico,” 182; “Gini index (World Bank estimate)- Mexico,” The World Bank, accessed December 10, 2020.https:// data.worldbank.org/indicator/SI.POV.GINI?locations=MX.; “Gini index (World Bank estimate)- South Africa,” The World Bank, accessed December 10, https://data.worldbank.org/indicator/ SI.POV.GINI?locations=ZA. Davis 95

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