by Dennis Small

	The band once again struck up a cheery tune on the deck of the
sinking Titanic in early January 1997, as groups of bedraggled
passengers in bankers' three-piece suits, with forced smiles plastered
on their faces, strutted out onto the dance floor to go through their
paces for the umpteenth time.
	The government of Mexico had just managed to pre-pay a $5
billion installment on the $50 billion loan package they had lined up
from the United States government and the International Monetary Fund
in the aftermath of the December 1994 explosion of the debt bomb in
Mexico.  London's {Financial Times} pontificated that this "marked
something of a watershed for the embattled country" and applauded
"Mexico's rapid economic turnaround." The British wire service Reuters
pronounced that Mexico had finally "shed the stigma of the peso
crisis". And Mexican president Ernensto Zedillo happily concluded that
``We have overcome the economic emergency.'' Mexico, the pundits all
agreed, had once again "turned the corner."
	It is now widely admitted, as only EIR had reported at the
time, that the Mexican meltdown of 1994 nearly sank the entire world
financial system. But the policies adopted since then, both in Mexico
and internationally, have totally failed to address the underlying
cause of the crisis: that global monetary aggregates, let alone the
financial aggregates that have been speculatively pyramided on top of
that monetary growth, have expanded hyperbolically and out of all
proportion to the physical economic activity which ultimately must
sustain them.
	This global problem has only worsened since December 1994. And
for Mexico specifically, the steps taken have {not} solved the
problem, nor even turned the corner, contrary to what the world has
been told. As the following study of Mexico's physical economy proves,
everything that has been done to deal with the crisis since that time,
has been exactly the opposite of what is actually required, and has
thus made things worse. Rather than building up Mexico's productive
apparatus, it has been further decimated at the IMF's insistence. And
instead of containing the speculative debt bubble, that cancer has
simply been fed and given a new lease on life--and it is once again
growing out of control.
	The picture that emerges is of a nation that is rapidly
becoming "Africanized." Since the relative high point of is economic
development in 1981, IMF policies imposed on Mexico have wiped out 22%
of its per capita production of consumer goods, 29% of its producer
goods, and left half of its labor force unemployed. Manufacturing
workers have become a dying breed, plunging from 10% to under 5% of
the total labor force, and science and engineering have become lost
arts. The cancer of the maquiladora assembly plants is rapidly taking
over the economy, setting up virtual Auschwitzes south of the U.S.
border, as required by George Bush's North American Free Trade
	As a result, Mexico today, two years later, stands at the
precipice of a debt bomb explosion...again. And just as it was two
years ago, Mexico in 1997 is both a microcosm, and a harbinger, of
what is to come in the world financial system as a whole.

Two years of destruction

	Precisely two years ago, in January 1995, EIR published an
in-depth study of Mexico's physical economy in order to explain the
causes behind the December 1994 meltdown. In that study, we looked at
the production of standard market baskets of consumer goods and
producer goods, over the time period from 1970 to 1994. For each of
the items included in our two market baskets, we calculated physical
production per capita or per household, measured in actual physical
units such as tons, kilowatts, etc., taken principally from official
government statistics as published by the National Institute of
Statistics, Geography and Information (INEGI). These series were then
converted into indeces (1981=100), and combined into an
equally-weighted composite index for each market basket.
	The result was a useful, if crude, first approximation of what
had happened with key elements of Mexico's physical economy over the
last 25 years. There was a consistent pattern of modest growth from
1970 through 1981, and then a visibile, across-the-board collapse
beginning in 1982 with the application of IMF policies.
	The study which follows below, both updates and expands
significantly upon our report of two years ago.
	In the case of {Consumer Goods}, our new market basket is made
up of 12 items (as opposed to 11 considered in 1995), and updates the
data from 1994 to 1996. Although the overall market basket had already
declined by 16% from 1981 to 1994, another 6% was lost in the last two
years alone--a clear acceleration of the crisis as a result of the
policies adopted in the wake of the 1994 debt blowout.  Total grain
production per capita, for example, had already dropped from 370
kgs. per capita in 1980, to 302 in 1994, but it then fell again to 283
kgs. per capita in 1996--a 7% plunge in just two years. Furthermore,
imports of food items to help fill the gap have also fallen off, since
Mexico has no money for imports but only for debt payments, and hunger
is now threatening to pass over into starvation in significant parts
of the country.
	As for {Producer Goods}, we expanded our market basket from 8
items considered in our first study, to 16 below. Available data in
this area is not as current as for consumer goods, so our earlier
picture only went up to 1991, and the current one goes only to
1994--i.e., still before the big collapse of the last two years. Even
so, the market basket of producer goods production also shows an
additional drop of about 7%, from an index level of 76 in 1991 to 71
in 1994 (see GRAPHIC #1). It is certain that when the data comes in
for 1995 and 1996, it will show that production plummeted even more
rapidly in these two years.
	One typical example is that of iron production, which dropped
from 548 kilograms per household in 1991, to 524 in 1994. Capital
goods was hit even harder: the production of electrical machinery and
equipment, for example, fell almost by half, from an index of 48 in
1991, to 26 in 1994.

EIR's `Standard Market Basket' Defined

	Besides updating our earlier study of consumer and producer
goods, the current report includes a number of new features that allow
for a broader and more thorough analysis of the Mexican physical
	In the current study, EIR has for the first time compiled a
market basket of 10 {infrastructure} related products and activities
as well, in order to profile this critical area of economic
functioning. Although preliminary, our findings are consistent with
the picture in consumer goods and producer goods: the infrastructure
market basket index rose modestly from a level of 87 in 1970 to a peak
of 100 in 1981, and then fell back to a level of 88 by 1994 (see
GRAPHIC 1). Here as well, the data for 1995 and 1996 are unavailable,
but will certainly show an accelerating rate of collapse.
	The second new feature is the development of a Standard Market
Basket, or norm, for Mexico, for purposes of judging actual physical
economic performance by comparing current levels to what they should
be. In similar EIR studies of the United States economy, a 1967
standard market basket has been used, since that year marks the high
water mark for the U.S. in most areas of physical economic activity,
after which there has been steady collapse. As such, it reflects a
level that must be returned to--as a jumping off point for subsequent
	In the case of Mexico, however, it is not appropriate to use
1967 or 1970 per capita and per household levels of production as a
standard, since there was real economic growth for another decade or
so after that. The 1981 levels, although the high point over the last
25 years, are not an adequate standard either, since the absolute
levels of output that year, per capita and per household, were in
general woefully inadequate to the objective tasks of development: it
would thus be misleading to judge Mexico's current performance by
simple comparison to such levels.
	Although it would certainly be good if Mexico, as an interim
step, got back to where it was in 1981, a far better market basket
standard can be developed by calculating what the level of per capita
production would have been, in each successive year, {had the average
annual rates of modest growth over the 1970-1981 period continued over
the next 15 years, from 1981 to 1996}. It is that standard, calculated
on a year by year basis, which we have selected as EIR's {Market
Basket Standard} or norm. Each year's current real output can then be
described as a percentage of what it should have been in that year, or
would have been had IMF policies not been imposed.
	Measured against this standard, the production of the market
basket of consumer goods in 1996 was 49% of what it should have been;
producer goods in 1994 were at 38% of the standard for that year; and
infrastructure in 1994 was at 49% of the standard (see GRAPHIC
2). This is the shocking reality of what has happened to Mexico's
physical economic potential under IMF dictates: it has been more than

Labor force and metric

	The third new element in the present study, is a survey of the
recent evolution of Mexico's labor force, which we present in the
section immediately below. Here is where we see the worst damage done
to the Mexican economy, and further proof that current policies are
leading to another blow-out.
	Out of a total population of about 95 million Mexicans in
1996, there are approximately 34 million who are considered part of
the Economically Active Population, or labor force. Of these, an
astounding 16.8 million are in reality unemployed--over 2 million of
them having joined the ranks of the unemployed in the last two years
of "rapid economic turnaround," as London's {Financial Times} happily
put it. In other words, as opposed to the laughable official figures,
Mexico's real unemployment rate today is 49%...and growing. Soon, more
Mexicans will be unemployed than hold real jobs. This is the surest
sign of a dying economy, of what might be called the "Africanization"
of Mexico.
	The number who hold actually {productive} jobs (see section
below for definitions of this and other categories) has stagnated at
just over 8 million, ever since 1983, which has meant a proportional
decline from 37% to 24% of the labor force. And the number employed in
the all important manufacturing sector have declined, from a high of
2.3 million in 1981, to 1.6 million in 1996.  Rather than being
employed in new manufacturing jobs at higher skill levels, hundreds of
thousands of Mexicans have been driven, at best, to slave labor jobs
in the maquiladora assembly plants along the border with the U.S.--the
legacy of Bush's NAFTA. Thus, employment in manufacturing in Mexico
proper, taken as a percentage of the labor force, shows a decline from
about 10% of the labor force throughout the 1970s, to an abysmal level
of less than 5% by 1996.
	These labor force proportions raise the central question of
the proper metric, or yardstick, to be employed in measuring the
performance of a physical economy. Measuring in terms of dollars or
other monetary units is clearly meaningless, as it has little or no
connection to the actual physical economic reproductive process. Any
fixed physical unit, such as tons, is also useless: it may seem to
work to measure performance within one product line over a specified
time frame (which is the limited use we have given it in our market
basket approximations), but it is clearly inapplicable as a unit of
measurement across different products (i.e., a ton of coal is not
conmensurable with a ton of wheat or, more to the point, a ton of
machine tools). And more importantly, such fixed physical units cannot
take into account the changes in the actual value of given products
that are brought about by the ongoing {technological} advance which is
the central feature of any successful economy (for example, a ton of
coal in the technological mode of 1920 is absolutely {not} the same
thing as that same ton of coal in the technological mode of
1990). This is the point at which all formal classroom mathematics
breaks down, in being able to explain or measure the process which
actually occurs in the physical economy.
	In point of fact, as Lyndon LaRouche has explained his
fundamental discovery in physical economy, economic growth is driven
by constant technological progress, which produces discontinuous leaps
as a society advances. Those technological breakthroughs are in turn
{causally produced} by human creativity alone, which both generates
new scientific concepts and spreads them throughout the economy. In
this, the machine tool sector plays a critical role, as the strategic
sector where such advances in ideas are transformed into machine tool
	Thus, it is man's creativity--as reflected in the development
of the productive powers of the labor force, through rising skill
levels--which is the only proper (non-mathematical) metric for an
economy--and for the entire physical universe, for that matter. As
Cardinal Nicholas of Cusa explained in his 1450 dialogue, {The Layman:
On Mind}, "mind is the measure of the universe."
	The relative success or failure of a society to foster such
creativity, LaRouche has explained, is then expressed as the potential
relative population density which that society is capable of
	It is with those considerations in mind that we have
emphasized, wherever the data were available for Mexico, not the
absolute numbers of employment, but the shifting internal
{proportions} of the labor force (i.e., the share of the total which
is deployed to each economic task), as a superior metric for capturing
actual economic trends.

Mexico's typical collapse function

	In the concluding section of this study, we contrast the
collapse of Mexico's physical economy, with the continuing wild growth
of its foreign debt obligations. It is the impossibility of continuing
to sustain this debt bubble as the real economy collapses, which
guarantees the imminent next explosion of the debt bomb in
Mexico. This is, of course, only a microcosm of the global financial
	LaRouche has repeatedly described this global process, with
the help of his famous "Typical Collapse Function" graphic (see
GRAPHIC 3). Here we see how hyperbolically collapsing
physical-economic input/output becomes incapable of sustaining the
hyperbolically increasing curves representing monetary aggregates, and
financial aggregates that are leveraged on top of these.
	Mexico's basic economic and financial parameters are almost a
carbon copy of this LaRouche graph.
	As the physical economy was collapsing by 7-10% over the last
two years, Mexico's real foreign debt continued to skyrocket. In fact,
the officially admitted component of this real foreign debt zoomed
from $136 billion at the end of 1994, to $180 billion at the end of
1996--a 32% increase in two years! Other categories of de facto
foreign obligations have also begun to rise again, after their forced
contraction in the year after the 1994 debt blow-out. Thus, Mexico is
back on the exact same track which led to the last meltdown--all the
while proudly proclaiming that it has "turned the corner."
	If we look at the growth of Mexico's real foreign debt,
against the market baskets of consumer goods and producer goods (see
GRAPHIC 4), the parallels with LaRouche's typical collapse function
are startling. Using 1981 as a base of 0, the real foreign debt has
climbed quickly to an index of 175, while consumer goods output has
dropped to -22, and producer goods output to -29. In GRAPHIC 5 a
similar comparison is made with total productive employment and real
employment in manufacturing (both taken as a percentage of the total
labor force).  Here we see productive employment dropping by a third
to -33, while the manufacturing component plunged by half, to -54.
	These, unquestionably, are "typical collapse functions," which
can be expected to play themselves out, until Mexico and the world
return to their senses. What that means is that the entire IMF system
has to be put through bankruptcy reorganization, and the development
of physical economy must become guided, once again, by what Cusa
rightly called the metric of the universe: man's creative mind.

From: Executive Intelligence Review
      February 1997