Series: 1944-2020, 76 years of interference from the World Bank and the IMF (Part 18)

The Mexican debt crisis and the World Bank

4 August 2020 by Eric Toussaint

In 2020, the World Bank (WB) and the IMF are 76 years old. These two international financial institutions (IFI), founded in 1944, are dominated by the USA and a few allied major powers who work to generalize policies that run counter the interests of the world’s populations.

The WB and the IMF have systematically made loans to States as a means of influencing their policies. Foreign indebtedness has been and continues to be used as an instrument for subordinating the borrowers. Since their creation, the IMF and the WB have violated international pacts on human rights and have no qualms about supporting dictatorships.

A new form of decolonization is urgently required to get out of the predicament in which the IFI and their main shareholders have entrapped the world in general. New international institutions must be established. This new series of articles by Éric Toussaint retraces the development of the World Bank and the IMF since they were founded in 1944. The articles are taken from the book The World Bank: a never-ending coup d’état. The hidden agenda of the Washington Consensus, Mumbai: Vikas Adhyayan Kendra, 2007, or The World Bank : A critical Primer Pluto, 2007.

Robert McNamara and president Luis Echeverria (1970-1976) were thick as thieves. The Mexican president had cracked down on the radical left. From 1973 on, Mexico’s foreign currency revenue soared thanks to the tripling of oil prices. This increase in currency revenue should have prevented Mexico from borrowing. However the volume of WB World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

loans to Mexico rose sharply: it quadrupled from 1973 to 1981 (from USD 118 million in 1973 to 460 million in 1981). Mexico also borrowed from private banks with the World Bank’s backing. The volume of loans from private banks to Mexico multiplied by 6 between 1973 and 1981. US banks led the field, followed in decreasing order by banks from the UK, Japan, Germany, France, Canada, and Switzerland. The amounts loaned by private banks were ten times those borrowed from the World Bank. When the crisis broke in 1982, there were no less than 550 banks to which the Mexican government owed money! Lending money to Mexico was the World Bank’s way of keeping its hold on Mexican authorities. From 1974 to 1976, the predicament of Mexican public finances seriously worsened. Yet the World Bank insisted that Mexico should contract more debts while the alarm signals were flashing.

On 3 February 1978 the World Bank boldly projected a rosy future: “The Mexican government almost certainly will experience a large increase in the resources at its disposal by the early 1980s. Our most recent projections show that … the balance of payments Balance of payments A country’s balance of current payments is the result of its commercial transactions (i.e. imported and exported goods and services) and its financial exchanges with foreign countries. The balance of payments is a measure of the financial position of a country vis-à-vis the rest of the world. A country with a surplus in its current payments is a lending country for the rest of the world. On the other hand, if a country’s balance is in the red, that country will have to turn to the international lenders to meet its funding needs. will show a surplus on current account by 1982… large increases in export revenues, mainly from petroleum and products, should make both the foreign debt problem and the management of public finance much easier to manage by the 1980s. The debt service Debt service The sum of the interests and the amortization of the capital borrowed. ratio of 32.6% (of export revenue) in 76, will increase progressively to 53.1% en 78, and thereafter will decline to 49.4% in 1980 and about 30% in 1982.” [1] The exact opposite was to occur. Every word of this prediction was contradicted by facts!

In October 1979, when Paul Volcker, then chairman of the US Federal Reserve FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank :
, decided on a steep rise in interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
that would inevitably lead to the debt crisis (which was to start in Mexico), the World Bank had reassuring words. On 19 November 1979 we read: "Both the increase in Mexico’s external public debt and especially the increase in the debt service ratio, which in 1979 may become as high as 2/3 of its exports (…), suggest a very critical situation. In fact, the truth is exactly the opposite.” (author’s underlining). [2] This is quite simply astounding.

The World Bank’s message consists of repeating that even when everything suggests there is cause for alarm, actually all is well, the situation is excellent, and you should just contract further debts. What would we think of a crossing-keeper who would tell pedestrians they should cross the railway lines when a red light clearly indicates that a train is arriving? What would a court say if such behaviour had resulted in loss of life?

Private banks of the North loaned exponentially higher amounts to developing countries, starting with Mexico.

One of the Bank’s economists in charge of monitoring the situation sent a most alarming report on 14 August 1981. [3] He explained that he disagreed with the optimistic view held by the Mexican government and its representative Carlos Salinas de Gortari, minister of Planning and Budget. [4] He later had serious problems with his hierarchy, and even decided to lodge a lawsuit against the WB (which he won). [5] In 1981 the World Bank granted Mexico a 1.1 billion dollar loan (scheduled over several years): it was by far the largest loan granted by the WB since 1946. In the early months of 1982 the World Bank still claimed that the increase in the Mexican GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
would average 8.1% a year between 1983 and 1985. On 19 March 1982, i.e. six months before the crisis, the president of the World Bank, Alden W. Clausen, sent the following letter to the Mexican president José Lopez Portillo: [6] "Our meeting in Mexico City with your top aides reinforced my confidence in the economic leaders of your country. You, Mr. President, can be rightfully proud of the achievements of the last five years. Few countries can claim to have achieved such high growth rates, or have created so many jobs… I wish to congratulate you on the many successes already achieved. As I stated during our meeting, the recent setback for the Mexican economy is bound to be transient, and we will be happy to be of assistance during the consolidation process” (author’s underlining). [7] Less than a year earlier, Alden W. Clausen still chaired the Bank of America, which was busy providing loan on loan to Mexico.

On 20 August 1982 Mexico, which had paid back considerable amounts over the first seven months of the year, stated that it could not pay any more. It decreed a six month moratorium (August 1982 to January 1983). It had only 180 million dollars in reserve and was expected to pay 300 million on 23 August. Already in early August Mexico had told the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
that its currency reserve was down to 180 million dollars. At the end of August the IMF convened with the Federal Reserve, the US Treasury, the Bank for International Settlements Bank for International Settlements
The BIS is an international organization founded in 1930 charged with fostering international monetary and financial cooperation. It also acts as a bank for central banks. At present, 60 national central banks and the ECB are members.
(BIS) and the Bank of England. The director of the IMF, Jacques de Larosière, told the Mexican authorities that the IMF and the BIS were willing to grant currency loans in December 1982 on the twofold condition that the money be used to refund private banks and that Mexico implement drastic structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

measures. Mexico accepted. It steeply devalued its national currency, considerably increased domestic interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rates, saved Mexican private banks from bankruptcy by nationalizing them and taking over their debts. In exchange, it seized the 6 billion dollars cash they had on hand. President José Lopez Portillo presented this measure to the Mexican people as though it were a nationalist move. He of course refrained from divulging that the 6 billion dollars would be used to pay back foreign bankers.

Who was really responsible for the Mexican debt crisis? Did Mexico start it?

Generally speaking, the reasons are obvious: a rise in interest rates decided in Washington, plummeting oil revenues and a huge debt are the structural causes. The first two are external factors and Mexico was helpless against them. The third one results from choices made by the Mexican leaders, whom the WB and private bankers encouraged to take on enormous loans.

Beyond these structural causes, which are fundamental, an analysis of how one thing led to another shows that private banks of the North started the crisis in that they significantly reduced the loans granted to Mexico in 1982. Aware that almost all available currency in the Mexican Treasury had been used to pay back the debt, they considered it was time to reduce their loans. In this way they brought one of the world’s largest indebted countries to its knees. Seeing that Mexico was facing the combined effects of a rise in interest rates – from which they profited - and a fall in its oil revenues, they chose to act first and move out. An aggravating circumstance was that foreign bankers had aided and abetted Mexican ruling circles (CEOs and leaders of the party-State called the Institutional Revolutionary Party) who were frantically transferring their capital abroad in order to invest it safely. It is estimated that in 1981-1982, no less than 29 billion dollars left Mexico as capital flight. [8] After precipitating the crisis private bankers then further benefited from it – and left it for others to mend matters. The evidence can be seen in the following tables.

Table 1. Foreign banks’ loans without any state guarantee and repayments to the banks (in million dollars)

Source: World Bank, Global Development Finance, 2005

The table traces the evolution of loans granted by private foreign banks without any guarantee by the state. We note that after a huge increase from 1978 to 1981, loans fell drastically in 1982. On the other hand repayments did not decrease. On the contrary they increased by close to 40% in 1982. In 1983 bank loans had completely stopped. Yet repayments were still well underway. The evolution of debt net transfer, which had been positive until 1981, became seriously negative from 1982 on. All in all, between 1978 and 1987, negative net transfer accounted for more than 10 billion dollars in profits for the bankers.

Table 2. Foreign banks’ loans with state guarantee and repayments to the banks
(in million dollars)

Source: World Bank, Global Development Finance, 2005

Table 2 shows the evolution of loans from foreign private banks that were guaranteed by the Mexican state. We note the increase in loans from 1978 to 1981. In 1982 loans decreased by 20% while repayments increased. Bank loans decreased sharply until 1986. By contrast repayments by the Mexican state continued at a very high level. Net transfer on the public debt to foreign banks contracted with a state guarantee, which had been positive from 1978 to 1982, became very seriously negative from 1983. All in all, the net negative transfer between 1978 and 1987 accounts for over 10 billions dollars in profits for the banks.

If we add up negative transfers in the two tables we reach a sum of over 20 billion dollars. Private banks in the North extracted juicy benefits from the Mexican people.

Table 3. WB loans to Mexico and repayments
(in million dollars)

Source: World Bank, Global Development Finance, 2005

Table 3 shows the evolution of World Bank loans to Mexico. We note a sharp increase from 1978 to 1981. The WB was then frantically competing with private banks. In 1982 and 1983 we note a moderate decrease. Loans increased again from 1984 on. The Bank behaved as a last resort lender. Loans were conditioned on the Mexican state repaying private banks, a majority of which were North American. Net transfer remained positive because Mexico did use WB loans to repay private banks.

Table 4. IMF loans to Mexico and repayments
(in million dollars)

Source: World Bank, Global Development Finance, 2005

Table 4 shows the evolution of IMF loans to Mexico. There were none between 1978 and 1981. Yet in those years Mexico repaid old loans. From 1982 on the IMF loaned massive amounts on two conditions: 1) the money had to be used to repay private banks; 2) Mexico had to implement a structural adjustment policy (reduction of social expenditure and of expenditure for infrastructures, privatization, rise in interest rates, increase in indirect taxation, etc.). Net transfer remained positive because Mexico did use IMF loans to repay private banks.

Table 5. Loans from countries of the North to Mexico and repayments
(in million dollars)

Source: World Bank, Global Development Finance, 2005

Table 5 shows the evolution of loans granted by the most industrialized countries. Like private banks and the World Bank, countries of the North sharply increased their loans to Mexico from 1978 to 1981. Then they did more or less what the WB and the IMF were doing. While private banks reduced their loans, they followed the IMF and the WB in loaning to Mexico in order to make sure that it could repay private banks and that it would implement the structural adjustment programme.

Table 6. Evolution of the Mexican external debt from 1978 to 1987
(in million dollars)

Source: World Bank, Global Development Finance, 2005

Table 6 shows the evolution of Mexico’s total external debt. It multiplied by 3 from 1978 to 1987. During this period the amounts that were paid back were 3.5 times the amount owed in 1978. Total negative net transfer accounts for over 26 billion dollars.

Since 1982 the Mexican people have been bled dry to assuage their various creditors. Indeed the IMF and the World Bank have exacted the last cent back from what they loaned to the country so that it could pay private banks. Mexico has been forcefully subjected to the logic of structural adjustment. The shock of 1982 first led to a steep recession, massive layoffs and a dramatic drop in purchasing power. Next structural measures resulted in hundreds of publicly owned companies being privatized. The concentration of wealth and of a large part of the national assets in the hands of a few Mexican and foreign industrial and financial corporations is staggering. [9]

In a historical perspective it is evident that the road to overindebtedness in the 1960s and 1970s, the explosion of the debt crisis in 1982 and the way it was managed in the following years marked a radical break with the progressive policies implemented from the start of the Mexican revolution in 1910 to the 1940s with Lazaro Cardenas as president. From the revolution to the 1940s, living standards notably improved, Mexico made great strides in economic terms and adopted an independent foreign policy. From 1914 to 1946 Mexico did not pay back any debt and eventually won a resounding victory over its creditors when the latter agreed to give up 90% of the amount owed in 1914 without claiming any interest either. Since the 1982 crisis Mexico has lost control of its destiny. Historically, this has been the US’s objective since the 19th century.

In 1970, Mexico’s public external debt amounted to USD 3.1 billion. 33 years later, in 2003, it had multiplied by 25, reaching 77.4 billion (public and private external debts together amounted to 140 billion). Meanwhile the Mexican government paid back 368 billion (120 times the amount owed in 1970). Net negative transfer from 1970 to 2003 amounts to USD 109 billion. From 1983 to 2003, i.e. over a period of 21 years, net transfer on the public external debt was positive only in 1990 and 1995.

We trust the day is approaching when the Mexican people will be able to win back their freedom to decide their own future.


[1D. Kapur, J. Lewis, R. Webb, 1997, vol. 1. p. 499

[2Idem, p. 499

[3Memorandum to files, “Mexico: Present Economic Situation – Problems and Policies”, August 14, 1981.

[4Carlos Salinas de Gortari became president of Mexico in 1988 as a result of a massive fraud to rob the progressive candidate Cuauthémoc Cardenas of his victory. He left the presidency in 1994, shortly after ratifying the North American Free Trade Agreement (NAFTA). See next chapter.

[5Here is what historians of the World Bank write: “The economist (at time of writing still with the Bank) had taken a much more alarmed view of Mexico’s macro prospects in 1981 and wrote up his dissenting economic analysis in the form of a memo to the files. His subsequent career at the Bank was jeopardized: after an embattled few years, he was reinstated after a legal battle. Pieter Bottelier, interview with the authors, January 19, 1993 in D. Kapur, J. Lewis, R. Webb, 1997, vol. 1., p. 603.

[6José Lopez Portillo was president from 1977 to 1982.

[7Letter, A. W. Clausen to His Excellency Jose Lopez Portillo, president, United Mexican States, March 19, 1982, in D. Kapur, J. Lewis, R. Webb, 1997, vol. 1, p. 603

[8Morgan Guaranty Trust Co. of New York, World Financial Markets, March 1986, p. 15.

[9The consequences of structural adjustment policies in Mexico are analysed in the first edition of Your Money or Your Life, The Tyranny of Global Finance, Chapter 15, Case study # 2.

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Greece 2015: there was an alternative. London: Resistance Books / IIRE / CADTM, 2020 , Debt System (Haymarket books, Chicago, 2019), Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012, etc.
See his bibliography:
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.

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