Mexico has experienced significant changes in social welfare policy since the early 1990s. The administrations of Ernesto Zedillo Ponce de León (1994–2000) and Vicente Fox Quesada (2000–2006) redesigned programs providing basic health care, housing, education, and retirement pensions in order to broaden access to these services. In some instances (particularly the partial privatization of health care and the creation of privately managed retirement pensions), meeting the goal of expanded program access in the context of continuing revenue shortages required the government to shift part of the responsibility for welfare provision from the public sector to individuals and families. The Zedillo and Fox administrations also adopted more selectively targeted programs aimed at reducing poverty in Mexico.

One key element underpinning these changes was a marked shift in the political logic shaping welfare policy making. In the social welfare model that developed during the period of Institutional Revolutionary Party (PRI) hegemony from the late 1930s through the 1980s, select constituencies gained access to public services as a form of patronage. Indeed, there was a wide gap between an official rhetoric proclaiming the federal government's constitutionally mandated responsibility to cover the basic welfare needs of all Mexican citizens, and actual policy practice. Programs such as President Carlos Salinas de Gortari's (1988–1994) main poverty-alleviation initiative, the National Solidarity Program (PRONASOL), were notably politicized.

In Chapter Three we discussed the surprisingly slow growth of the Mexican economy once it opened up to foreign trade and investment. We noted that one of the causes of Mexico's sluggish economic performance since the mid-1990s has been the scarcity of credit for firms and households. Indeed, whether we compare Mexico with other members of the Organisation for Economic Co-operation and Development (OECD) or with other Latin American countries, Mexico has an extraordinarily small banking system. As Figure 4.1 demonstrates, in 2005 the ratio of private credit to gross domestic product (GDP) in Mexico was the smallest of any OECD country. Moreover, it was the smallest by a very wide margin, even when compared with the economies of Southern and Eastern Europe. Mexico also does not fare well when compared with other Latin American countries. As Figure 4.2 shows, in 2005 Mexico's banking system, as a percentage of GDP, was dwarfed by those of Chile, Honduras, Uruguay, Bolivia, Costa Rica, Brazil, and even Nicaragua. It was even small by the standards of Ecuador, Peru, Colombia, and Guatemala. In fact, in 2005 there were only two countries in the region with banking systems that were appreciably smaller than Mexico's: Argentina and Venezuela.

Perhaps even more surprising is the fact that Mexico's banking system has been shrinking over time. As Figure 4.3 makes clear, the ratio of bank loans to GDP in Mexico declined drastically between 1994 and 2005.

Since the early 1980s Mexico has experienced momentous economic, political, and social change. Of the various transformations examined in the preceding chapters of this book, the consolidation of a competitive electoral democracy was particularly important because it ended well over a century of authoritarian rule and established essential (albeit insufficient) bases for a liberal-democratic order. The combination of free and fair elections, intense multiparty competition for power, and heightened media scrutiny of political developments has significantly increased Mexican citizens' capacity to hold government officials accountable for their public actions. Partisan alternation in power at the national level and assertive actions by federal legislators and judicial authorities in a more effective system of checks and balances have also greatly constrained what was once an all-powerful presidency. Moreover, nongovernmental organizations and other civil society groups with widely divergent goals and partisan loyalties play an important role in what is an increasingly pluralistic public policy-making process.

Nevertheless, Mexico is burdened by multiple legacies of authoritarianism and the rent-seeking coalitions that ruled the country until the end of the twentieth century. For instance, the persistence of public monopolies and private oligopolies in key economic sectors, and the weakness of government regulatory authorities charged with promoting competition and protecting consumer rights, are direct legacies of the concentrated political and economic power that characterized Mexico under the Institutional Revolutionary Party (PRI) and the fact that the privatization of many state-owned firms during the 1980s and early 1990s occurred while that regime still held sway.

This book is about a revolution – albeit an incomplete one. It had none of the features that political analysts typically associate with revolutions: no organized violence, no overturning of the social class structure, and no defeated dictator fleeing into exile. Nevertheless, if by “revolution” we mean a dramatic change in the institutions that organize economic, political, and social life, then Mexico has undoubtedly been in the midst of a revolution since the early 1980s.

In 1980, Mexico was largely closed to foreign trade and investment; government-owned firms controlled a substantial portion of the economy. An “official” party, the Institutional Revolutionary Party (PRI), held a virtual monopoly on political power. Since its creation in 1929, Mexico's government-supported party had won every presidential, gubernatorial, and senatorial election. To maintain a façade of democracy, PRI-led administrations crafted a complex set of electoral rules that allowed other parties, some of which were actually subsidized by the government, to win seats in the federal Chamber of Deputies (Mexico's lower house of congress). The PRI, however, always dominated this chamber by an overwhelming majority. The PRI used its electoral dominance to maintain control over Mexico's regulatory and legal systems: PRI-affiliated government officials named state and federal judges and the directors of government-owned firms as well as making appointments in the federal bureaucracy.

The Institutional Revolutionary Party (PRI) was fortunate that the presidential election held in July 1982 took place before the government announced a debt moratorium in August and nationalized private banks in September. For several decades the party had sought to legitimate its monopoly on power on the basis of Mexico's record of sustained economic growth and rising living standards for urban and industrial workers and other key constituencies. Those claims to legitimacy were, however, now difficult to sustain. The value of the peso had collapsed. In 1981 the peso–U.S. dollar exchange rate was 26:1; by 1983 it was 144:1, and by 1985 it was 372:1. Inflation skyrocketed. Investment contracted, with the ratio of gross fixed capital formation to gross domestic product (GDP) falling from 27 percent in 1980 to 18 percent in 1983 (see Figure 3.1). The wages of Mexican workers went into a free fall. Hourly wages in the manufacturing sector, adjusted for inflation, fell by 26 percent from 1981 to 1983 – and then kept falling. By 1986 they were only 51 percent of their 1981 level (see Figure 3.2).

The government needed to find ways of protecting the interests of its principal constituencies or the party risked losing its hold on power. The immediate challenge was to rekindle growth, which required that the government devise some means of inducing investment.

The Institutional Revolutionary Party (PRI) paid a substantial political cost for the poor performance of the Mexican economy during much of the 1980s and 1990s. The party had legitimated its monopoly on electoral office in part by portraying itself as the architect of an “economic miracle” that had, over a span of several decades, industrialized the country and generated rising standards of living. As we discussed in Chapter Two, these claims had always been overstated. But more than a decade of recurrent financial crises and slow economic growth gradually undermined whatever validity they had. For the first time in its history, the PRI began to face serious competition from opposition forces on both the right and the left of the political spectrum.

There was nothing inevitable about the process by which Mexico democratized. In fact, progress toward electoral democracy in Mexico was gradual and halting. It is certainly true that long-term changes in Mexican society – increasing urbanization, the growth of an educated middle class, and the emergence of groups of students and intellectuals who were not easily co-opted – posed a challenge to Mexico's ruling party from the 1960s onward. These factors alone, however, cannot explain the PRI's eventual loss of national power. Electoral democratization owed as much – or more – to contingent economic and political developments.

Ironically, some of the strategies that PRI-led administrations adopted to forestall economic collapse, or to rekindle economic growth, undermined the coalition that had long supported the party's monopoly on power.

Mexico experienced major economic and political transformations during the 1980s and 1990s that ushered in an open economy and electoral democracy. These transformations are not understandable if viewed outside of the broader context of Mexico's history. Thus, a balanced assessment of both the importance and the limits of these changes requires an understanding of Mexico's political economy before 1982.

Twice in its history, Mexico was governed by authoritarian regimes based on rent-seeking coalitions. The first was the dictatorship of Porfirio Díaz (1876–1911, a period known as the Porfiriato); the second was the party-based authoritarian regime that took shape in the aftermath of Mexico's 1910–1920 revolution and held sway until the election of Vicente Fox Quesada in 2000. These two regimes differed greatly in their social bases, their degree of political institutionalization, and their resilience in the face of pressures for change. Yet these regimes also had some important things in common: They produced long periods of stable government, centralized political power in the presidency, and pursued protectionist economic policies. Both regimes also produced a highly unequal distribution of the benefits of economic growth – a direct result of the fact that they allocated public policies and property rights selectively, so as to benefit primarily the core members of the coalitions that supported them.