Is Mexico’s Past Russia’s Present? The Life Cycle of ‘Perfect Dictatorships’

The historian Nikolai Zlobin and others have written on the evolution of the Soviet regime. Zlobin believed that under Stalin, the regime was essentially controlled by him personally, and enjoyed certain legitimacy – whether based on enthusiasm or fear. Under Brezhnev however, it had evolved to a regime dominated by the nomenklatura, and the loyalty of the population increasingly had to be “bought” with material goods and some small freedoms not enjoyed under Stalin. Likewise, the Mexican one-party regime, which lasted 71 years, essentially went through stages in what concerns its political economy. We had essentially four.

1. Authoritarian regime enjoys certain legitimacy, is fiscally and monetarily conservative
2. Authoritarian regime begins to lose legitimacy, becomes fiscally irresponsible to compensate and “buy” its support
3. Regime has little choice but to impose shock therapy with successful short-term outcome in macroeconomics but destroys its support and power base, and loses power
4. New, legitimate government comes to power. The question is, What does it do?

These four stages in some way overlap with the Soviet ones, though with a crucial difference: The macroeconomic reforms were conducted by the regime itself, unlike in Russia, where the regime had to fall before serious economic reforms could be undertaken.

Several have noticed the mexicanization of Russian politics. I usually say that Russia is “Mexico on acid” since the same ingredients and pathologies are present, but at very different degrees. Mexico certainly resembles the transitions in this part of the world. In Demokratizatsiya we published a very interesting article by Nikolas Gvosdev comparing the Mexican regime with Putin’s Russia, where he speaks of managed democracy.

Since Russia is a form of authoritarian regime once again, maybe these stages will shed some light on the Russian future as well. That actually is the main purpose of this talk.

Stage 1: 1929 to 1971. 40 years of responsible management by a legitimate one-party regime

The PRI, or Institutional Revolutionary Party, was created in 1929, 19 years after the Mexican revolution began. It is a myth that it evolved from the Revolution, as this was a liberal revolution against a tyrannical regime. The Revolution never contemplated collectivization and presidentialism. It was not meant to be a one-party dictatorship. That is, until a Mexican Marxist and head of the main trade union confederation, Vicente Lombardo Toledano, influenced by Stalin’s experiment here, decided in the 1930s to give that organization a “Soviet” feel by assigning to it the “leading role” in society status and creating the corporatist structures to accompany that new role.

What were the elements of this system that Nikolas Gvosdev called “managed democracy,” or Mario Vargas Llosa called “the perfect dictatorship”?

Its sympathizers used to say it was “society in motion.” During elections, society magically mobilized to vote for the PRI. In reality, the PRI was a party of power, devoid of ideology, its nomenklatura was more interest-driven and had a certain mentality, no different from the post-communist countries here. The one-party system dominated the institutions, including the legislative and judicial powers. This is one of the main reasons why property rights, especially in agriculture, were kept purposefully vague by the PRI regime—as a way of control.

Also in some way it was “voluntary servitude.” In this first stage, the PRI enjoyed a degree of legitimacy from a passive population.

Two main things characterized the political economy in this first stage. Macroeconomic management by the regime before 1971 was responsible, as it was in Gustav Hus'ak’s Czechoslovakia. Inflation, external debt, deficits, were simply not a problem in this period and Mexico enjoyed considerable progress, growing healthily while avoiding the political instability of the rest of Latin America. However, microeconomically, Mexico was the classic “economy of dictatorship,” whereby the main monetary and business interests are expected to support the ruling party. Property rights were kept vague, the economy autarkic and the common citizen was expected to pay the bill of the resulting oligarchy.

It was Tatyana Zaslavskaya’s “pyramid,” whereby the dictator depends on the heads of corporatist structures, not directly on the people, and therefore feels obliged to keep these interests and sectors happy at the expense of the general well-being. Therefore, the PRI could not combat corruption, since it would be cannibalizing itself. What they did do, was thoroughly and carefully document corruption of its members, as a way of blackmail to ensure loyalty.

Stage 2: 1971 to mid-1980s. When the regime has to buy its legitimacy

This stage was begun by President Luis Echeverr'ia, inaugurated at the end of 1970. It was characterized by a sharp orientation towards statist and populist policies, increased repression against the opponents of the regime, and the beginning of a sharp deterioration in the country’s economy as the regime began to lose legitimacy.

Why did Mexico go from Stage 1 to Stage 2? Perhaps because of that theory of social change explored for the Soviet Union by scholars such as Moshe Lewin. A new middle class had emerged, with certain demands and expectations that the regime had trouble coping with – a regime designed for essentially a different country.

This culminated in the bloody repressions in 1968 right before the Olympics and later in 1971. After this, the PRI under the Echeverr'ia proactively attempted to co-opt the leftist rhetoric by launching a new state-led development strategy with its accompanying profligate spending.

This was our “era of stagnation,” and Mexico had its Brezhnevite phenomenon also according to Zlobin: The one-party regime was not necessarily the cause of the economic mismanagement, only when this one began to lose legitimacy and had to buy its legitimacy. These were some of the economic changes:

• Public enterprises went from 200 to 1,200.
• The share of public enterprises in GDP reached over 17% in 1983.
• Public spending went from 25% of GDP to 38% of GDP, in order to “promote economic growth.” Of course, this just widened the budget deficit.
• Transfers and subsidies became 8.4% of GDP, and 24% of total public sector spending.
• In 1982, the president unconstitutionally expropriated the banking sector.

As is usual in these types of regimes, and as Kalman Miszei would agree, the statism did not really help the poorest segments of society and it certainly damaged, some say wiped out, the middle classes, which had been growing steadily in the past few decades of macroeconomic discipline. The ones that did benefit were mostly the corporatist interests that maintained the PRI in power.

Stage 3: Mid 1980s to 2000

This stage is defined by the macroeconomic reforms imposed by the regime to bring the situation under control, and at the same time to find a new source of legitimacy as a competent economic manager. However, this ended in the regime’s collapse.

What were the elements of our dictatorship-driven shock therapy?

• Almost 1000 public enterprises were discarded.
• Trade deregulation was accompanied by free trade agreements such as NAFTA.
• Government transfers and subsidies fell to 2.5% of GDP and 15% of the budget by 1992.
• Likewise, the budget deficit also plummeted.
• Therefore, inflation was tamed.

Despite all these reforms, there was little tangible payoff, which the PRI had been hoping to use as a new source of legitimacy. For example, average growth rate of GDP per capita between 1989 and 1994 was about 1.2 %. Why? Economists still debate it, but because the PRI basically wanted to “have its cake and eat it too.”

The PRI system was still weighing heavily on the economy, imposing what can be called the “dictatorship tax.” If you recall, microeconomically, the PRI still represented an “economy of dictatorship,” with heavy controls, regulations, lack of opportunities for entrepreneurs, monopolies and corruption – all designed to keep its oligarchy and nomenklatura satisfied.

There is a recurring phenomenon between 1970 and 1994, which is called the “sexenio crisis.” At the end of every presidential six-year term, our currency, the peso, crashed and there was a financial crisis. Jonathan Heath, an economist, studied the underlying reasons for this phenomenon. His conclusion is that these reasons were political in nature. For example, before the elections the regime liked to over-value the peso, in order to give a sense of economic prosperity, but which affected everything from exports and manufacturing, to the amount of reserves in the central bank, to the health of the collectivized farms, which could not compete with cheap imported food products. Other factors that Heath talked about were the lack of transparency, reliance on short-term speculative capital, excessive growth in credit, absence of independent monetary policy, and mishandling of initial symptoms of the crisis—all the typical attributes of a regime of this type.

Despite macroeconomic stability, the regime’s underlying illegality also scared away foreign investors. For example, despite its privileged geographical position and despite the trade agreement with the US, Mexico still only attracted a fraction of foreign investment as compared to other countries. In the last years of the PRI regime, it was about 10 billion dollars on average, but per capita, it was about one-fifth of what Chile, the Czech Republic and Estonia were attracting.

This is the price of half-baked, dictatorship-led reforms. But was this new crony capitalism better than the old crony socialism? Many Mexicans do not believe so, which is why the very word “privatization,” “capitalism,” and such, provoke such adverse popular reactions.

Between February of 1994 and January of 1995, central bank reserves fell from 30 billion dollars to 4 billion in order to prop up the strong peso, since it was electoral season. However, the bank kept these figures secret – except for a few oligarchs who heard the new president Zedillo speak about the impending crisis at their private luncheon. So they, including Carlos Slim—Latin America’s richest man and our own “vor v zakonie”—changed their vast wealth into dollars and depleted what was left of the reserves.

The resulting crash in the peso could have been worse had it not been for the IMF and President Clinton’s personal intervention to inject cash and credit guarantees into the Mexican economy, therefore stabilizing the situation. However, the banking assets were now worth half of what they were, and bad debts also increased sharply.

These regimes tend to die from “blood disease,” when the blood of the regime becomes contaminated through chemical contradictions. What was the blood of the communist system? In Central Europe before 1989, it was repression. When Gorbachev made clear he would not prop up these regimes, they fell. In the USSR, the blood was, at least de jure, mostly ideology, so here contradictions were mostly ideologically driven, and so we saw Soviet democratization as attempts to address these contradictions, ultimately leading to the death of ideological communism and what it was sustaining. However, in Mexico the blood of the PRI was not ideology nor repression, but corruption, so the contradictions that contaminated that blood were mostly related to corruption.

When the economic crises appeared, the last three PRI presidents had no choice but to privatize, balance the budget, cut expenditures to the beloved “society in motion,” all of which meant that the corporatist system could not be kept happy and it began to fall apart – there were less opportunities for corruption and so the PRI’s blood began to become contaminated. The PRI started to lose elections, beginning with its first lost governorship in 1989, then its majority in the federal Congress in 1997, then finally the presidential election in 2000.

Stage 4: After 2000

What happens when a one-party dictatorship loses the election, but its extra-constitutional toxic waste remains, polluting the political and economic atmosphere?

One of two paths can be followed. The first is what Anders Aslund, Jeffrey Sachs and others have recommended, which is to use the window of opportunity to aggressively dismantle the old system, build a new system and manage the situation pro-actively. This is what Mart Laar did in Estonia, perhaps the most successful transition. It was also later done by Mikulas Dzurinda in Slovakia and Ivan Kostov in Bulgaria.

It is an interesting paradox that while dictatorships such as the PRI can conduct macroeconomic reforms, only a legitimate government can conduct the type of microeconomic, legal, regulatory and administrative reforms necessary for sustained economic growth. But the new government has to act decisively.

The second path a democratic, transition government can take is to essentially do nothing, assume that the problems will go away by themselves, make peace with the corporatist elements and the nomenklatura of the old regime and find a “middle ground” to ensure social stability. This is what Emil Constantinescu did in Romania upon his victory in 1996.

Well, in Mexico, for many unfortunate reasons, the Constantinescu approach was chosen.

Thanks to this, in Mexico we may be living a situation similar to what Belarus enjoyed under Stanislau Shushkevich, a small interregnum of freedoms between variations of authoritarian rule.

As far as the economy is concerned, the PRI’s “economy of dictatorship” continues essentially the same, with monopolies, excessive regulation, lack of property rights, a messy tax system, collectivized agriculture and the resulting distortions that manifest themselves in actually more corruption than under the PRI (according to Transparency International), zero economic growth in the last four years and only slightly more investment than under the dictatorship.

What does all this mean for Russia?

Some excellent research and regression analyses by Mau, Zhavoronkov, Malysheva and others in their recent IET book adds to the literature on the correlation between democracy and institutional reform, and economic growth. An article by Mikhail Beliaev, recently published in Demokratizatsiya, also concludes the same running regression analyses in the Russian subjects of the federation themselves: The more democracy, the more sustainable economic development.

What is the blood of this regime? What are the chemical contradictions that will bring it to an end? Is it the price of oil? Is it the ever-growing lack of democracy? Democracy and openness, as many have argued, act as a form of dialysis, a way to cleanse the blood. This regime may be committing suicide by shutting off this mechanism, as the PRI did in Mexico.

President Putin is beginning to make mistakes, is becoming over-exposed, people are beginning to blame the tsar for their daily problems. As Aslund has argued, Putin can become a victim of his own success—total power accumulation. Even if things go well for the economy under Putin, do not underestimate the theory that economic growth leads to increasing demands for democracy—the so-called Lipset Hypothesis. The liberals in some ways have to wait for the window of opportunity to open again, as happened in Bulgaria in 1996, to this time take the decisive action that eluded them in 1991.

If and when the liberals come back to power in Russia, will they leave the KGB intact, keep out the foreign banks, leave the nomenklatura in key positions and concentrate only on macroeconomics and foreign policy? Or will they finally make Russia a normal country, ready to address the problems of her citizens and not just of the elites?

Thank you again.