The political economy of Mexico, 1940–1988: A game theoretical view

European Journal of POLITICAL

European Journal of Political Economy ECONOMY Vol. 11 (1995) 291-316 ELSEVIER

The political economy of Mexico, 1940-1988: A game theoretical view

Gonzalo Castafieda *

Universidad de las Am~ricas-Puebla, Departamento de Economia, A.P. 100, Sta. Catarina Mdtrtir, 72820, Puebla, M~xico

Accepted for publication September 1993

Abstract

A Game Theory interpretation is presented of the Mexican economy between 1940 and 1988. It is assumed a Mexican State with objectives of its own, coming from its commitment to the capitalist system and the need of legitimacy. The model consists of a differential non-cooperative game for three players (government, entrepreneurs and workers). The equilibrium strategies offer a rational explanation of several stylized facts of the period. In particular, the model suggests that the policy swings in different administrations moving (apparently) from one side of the political spectrum to the other, are not necessarily a consequence of the ideology of the president in office, but instead are an outcome of the political-economic environment of the moment.

Keywords: Mexico; Applied game theory; Mixed economies; State autonomy

JEL classification: P16

1. Introduction

All economies are based on political and economic institutions. Social actors

coexisting in these institutions (or structures) have an interdependent behavior; that is, the actions of some are affected by others' behavior and, even more, the

* I am grateful to Fausto Hernfindez for his comments on a preliminary version of this paper.

0176-2680/95/$09.50 © 1995 Elsevier Science B.V. All rights reserved SSDI 0176-2680(94)00024-E

292 G. Castaheda / European Journal of Political Economy 11 (1995) 291-316

interests of the different actors might be in open conflict. The capacity of social groups to influence each other depends on the institutional arrangement, so that the working of each system gives place to particular economic, political and social phenomena. Therefore, one way to corroborate the validity of a certain hypothesis about the nature of a society consists of modeling its different structures in the form of a game; hence, if the results derived from the game do not coincide with observed facts, the hypothesis should be discarded. 1

The purpose of this paper is, precisely, to present an interpretation of the Mexican system applying the theoretical framework of Differential Games. 2 The model is based on ideas coming from the literature on Mexican political economy. The selected game reproduces certain stylized facts that were presented in a large part of the period: capital flight, reduced fiscal burdens, continuous transfers to private sector, external indebtedness and a sustained loss in government legitimacy along with economic growth. 3 It is important to emphasize that, given the degree of generality of the model, it is not possible to explain each and all of the different episodes that took place during the four decades in which the system prevailed. 4

In the next section, the period of study is defined and the most important elements of the hypothesis known as 'Relative Autonomy of the State' are indicated, which is the one used to build the model. Given that the dynamic characteristics of certain systems generate inconsistencies that later cause their collapse, the macroeconomic dilemmas of the Mexican system are explained in Section 3. A model applying the Theory of Differential Games is developed for the Mexican economy and its solutions are presented in Sections 4, 5 and 6. Section 7 introduces a slight variation of the model by allowing the possibility of a break in the rules of the game. Finally, conclusions and possible extensions of the analysis are covered in Section 8.

2. Political-economic structure in Mexico

Although the year 1920 can be considered the beginning of the Post-revolutionary Mexican model, it was not until 1940 that the main institutions that support

1 Strictly speaking, the incompatibility between observed facts and the solution of the game only means that observed behavior does not correspond to equilibrium strategies of the game.

2 This paper has its roots in the literature of political economy and credibility - see Persson and Tabellini (1990).

3 Here, legitimacy is understood as the deterioration in the relative welfare of the masses. In a wider sense, government legitimacy has three watersheds: ideological, socio-economic and political. See Saldlvar (1988, Chapter II).

4 For the adequate modeling of some of these episodes it would be necessary to include asymmetric information and sequential movements. Moreover, some of the facts would be better explained using a two-period game, where it is much easier to analyze time inconsistency.

G. Castaheda / European Journal of Political Economy 11 (1995) 291-316 293

the political-economic system were established. 5 A political-economic structure is defined as the institutional framework where the different factions of the dominant block and the remaining actors (independent and subordinated) in a society interact. Dominant factions (or main actors) in the Mexican system are: the private sector, organized workers and the government. For the purpose of this highly aggregated model, international capital represented by transnational corporations operating in Mexico are thought to have the same interests as those of national entrepreneurial groups. Although the peasant movement was institutionalized within the 'official party', the PRI (Institutional Revolutionary Party), through the Peasant National Confederation (CNC), peasants are not considered part of the dominant block because, from 1940 on, the State pursued an accelerated industrial- ization process, leaving behind agricultural production and peasants' demands. Peasant groups were totally suppressed by the tutelage of the State, which used the so-called 'ejidos' (cooperatives without land ownership) as a control device. 6

The relative (or limited) autonomy of the State seems to be the most appropri- ate theoretical framework to describe the Mexican reality. As this approach suggests, the facts show a capitalist group with a growing share of the national wealth; but at the same time, post-revolutionary governments implemented, on several occasions, economic policies that were contrary to private capital interests, causing intense disputes between entrepreneurial groups and the government.

Therefore, it does not make sense to think that the government was in complete collusion with entrepreneurial groups. On the contrary, the Mexican government had objectives of its own; these often favored private interests but arose from its commitment to the capitalist production system and the need to achieve legitimacy amongst the masses. Mexico's dependence on international economic interests and on post-revolutionary political elites, which attempted to create a modern industrial economy, gave birth to a political-economic structure that allowed and encouraged private accumulation of capital. In other words, the relationship between the government and entrepreneurial groups indicated a shared economic vision with respect to the national project, but this did not mean ideological affinity. The State was able to establish the rules of the game, consolidating its strength in economic activity through different means: land redistribution, fiscal and monetary policies, state-run firms, price controls and all kinds of interventions in trade, investment and labor markets. 7

5 For a more detailed description of this and other hypotheses of the Mexican State see: Aguilar- Camln (1990), Aguilar-Camln and Meyer (1991), Basafiez (1990a, b), Camp (1989), C6rdova (1989), Coslo-Villegas (1973), Cypher (1990), Hamilton (1983), Levy and Bazdresch (1991), Rodrlguez-Araujo (1988), Saldlvar (1988), Teichman (1988).

6 Obviously, there are other classifications of dominant factions - see for example Saldlvar (1988); however, here I am interested in highlighting the active role of the State as a separate player from capitalists and workers.

7 See Levy and Bazdresch (1991).


On the other hand, since social demands of the masses were the instrument which legitimized and made possible the uprising of different power groups in dispute between 1910 and 1920, post-revolutionary governments took the responsibility of creating a welfare state. The same institutional arrangement subscribed to by the State and the workers' leadership, advocated the creation of an industrial economy, which increased the power of organized workers and opened a space for social issues. Consequently, the rules of the game, modeled by the State, con- nected the objectives of 'official union leadership' with genuine workers' demands, like social infrastructure (schools, social security, housing, etc.) and wages. The State took the responsibility of pursuing industrial development and, at the same time, offered to guarantee a relatively higher standard of living for the masses. Subordination of labor unions did not mean total dependence of workers on the State; many authors have pointed out that the 'inclusionary' nature of the Mexican State, given to cooptation and incorporation, also meant a sphere of influence by the union leadership. 8

3. Macroeconomic dilemmas of the Mexican system

Although the post-revolutionary structure permitted the existence of the State in a peaceful environment coupled with a growing economy, it had a series of dilemmas that frequently precipitated shocks which jeopardized the stability of the system. Later, these dilemmas implied the need to make profound changes in the rules of the game, as proved by: the adverse results of the 1988 election where the opposition received a relatively high percentage of the vote, the economic pacts implemented since the end of •987, the reprivatization process and the opening of the economy to more international trade.

The first dilemma arises from the commitment of the Mexican State to guarantee social well-being. On the one hand, the government wants to raise fiscal revenues in order to obtain resources needed for social infrastructure; on the other hand, high taxes discourage investment and hence future taxable income will be lower, reducing the possibility of increasing social welfare. Moreover, high taxes restrain productive expansion, which is the other objective of a Mexican government committed to capitalist development.

The second dilemma involves entrepreneurial groups, which have to decide between retained earnings (which expand productive capacity) and dividend payments (that are devoted to consumption and/or investment abroad). A larger consumption today, at the expense of lower retained earnings, implies a lower expansion of productive capacity and, consequently, a lower potential for future earnings; however, reinvesting those earnings causes capitalists to be at the mercy of uncertain government decisions and future wage demands. More investment

8 See Trejo (1990, chap. 1), Zazueta and De la Pefia (1984, chap. XI) and Bizberg (1990).


abroad, as a form of safe haven and at the expense of internal accumulation, implies wasting high returns of internal capital.

The third dilemma concerns organized workers, who risk diminishing profits by demanding higher wages, which discourages future investments in the country. On the contrary, if wage demands are restrained in order to allow the expansion of installed capacity, and hence the size of the pie, workers can be 'a posteriori' affected when capitalists decide to consume additional earnings or reinvest them abroad.

The fourth dilemma arises from the development role assigned to state-owned firms. Larger transfers to the private sector through subsidized input prices, despite their contribution to private sector accumulation, help to decapitalize state-owned finns, and are conducive to the generation of fiscal deficits and bottlenecks in production. On the other side, lower transfers diminish the profitability of private investment and incite accumulation abroad.

The fifth dilemma has its roots in the conflict of interest born of the different roles of state-owned firms, as government agencies and as firms. Wage concessions detract from the profitability of government firms, their capacity to generate resources and their power to increase productive infrastructure. However, the acceptance of lower wages will result in pressure by the workers on government to respond with other kinds of concessions - for instance, social expenditure. In the next four sections a model will be built to analyze the consequences of the macroeconomic dilemmas just mentioned. It will be shown that the equilibrium strategies of the game are compatible with the stylized facts pointed out in the introduction.

4. A model of conflict among three social actors

The political-economic system of Post-revolutionary Mexico, as described above, can be modeled by means of a non-cooperative game amongst three players, defining the different factions in the block of power. Since no player makes commitments in advance, the equilibrium concept to be used here is the Nash equilibrium. In this dynamic game, there is simultaneity only within each period, thus the game observes 'almost perfect information'. 9

The model developed below comes from a line of research started by Lancaster (1973), who used a differential game to analyze the capitalist paradigm. 10 He

9 See Tirole (1988, p. 431). If the government made the first move (acting as a leader), the proper equilibrium concept would be Stackelberg. However, here it is assumed that the decision process is not dominated by any player.

10 Fiscal policy in the context of differential games has been analyzed by Gradus (1988), Gradus and De Zeeuw (1990) and Gradus (1990). In this last paper the author considers a three-player game, yet government and consumers have identical objective functions.

296 G. Castaheda /European Journal o f Political Economy 11 (1995) 291-316

concludes that there is a dynamic inefficiency in the capitalist form of distributing the product between workers and capitalists. Yet the model built by Velasco and Tornell (1990) is the immediate antecedent of this paper. These authors explain subinvestment and capital flight as an outcome of a differential game for two players.

4.1. Government's problem

For modeling a government committed to industrial growth and devoted to social well-being, the following objective function is assumed: 11

u ° = fo -~-~_ l [~Tbt + ( 1 - 71)Kt](~- ')/~e-at dt, (1)

where: U ° is government utility along the planning horizon, 0 < o-< 2, o-~ 1; a is the elasticity of the consumption intertemporal substitution; r/ is a parameter indicating the weight given by the government to social well-being vis-a-vis internal capital accumulation, 0 < 77 ~< 1; b t is social expenditure realized in the p e r i o d ; g t is capital stock in the economy, K t = K p + Kt ~, K,= 0 = Ko; K p is the private sector's capital stock; K g is state-owned firms' capital stock.

The government has under its control two variables: tax rates and the prices of goods produced by state-run firms. It is assumed that fiscal revenues (T t) come exclusively from taxing income in private activities, and that state-run firms' pricing policy is a transfer mechanism used by the government (S t) to encourage private investment. In order not to complicate the model, a balanced budget is assumed, i.e. social expenditure equals fiscal revenues at any given moment - setting aside monetary and inflationary issues; although, as it will be seen below, the model allows external indebtedness of state-owned firms.

Balanced budget:

b t = r t . ( 2 )

Given the 'populist' stance of the State and the inclusion of popular organiza- tions in the 'official party', government obtains legitimacy as long as capitalists' relative utility does not exceed a maximum bound needed to maintain political order.

11 Although the selected utility is somewhat ad hoc, the approach would be valid if the outcomes of the model reproduce the stylized facts of the Mexican economy; as it will be shown below. The U G function is not a simple weighted average of the utilities of the capitalists and workers since the government has objectives of its own.

G. Castaheda / European Journal of Political Economy II (1995) 291-316 2 9 7

Legitimacy constraint: ~2

U, c - - ~< H , ( 3 ) u, w

where: U¢ c, Ut w are instantaneous utilities of capitalists and workers, respectively. Government is aware that the process of internal accumulation - i .e . inside the

country - by entrepreneurial groups is restrained when taxes absorb a large proportion of surplus, and therefore the following transition equation is needed:

Internal accumulation of private capital:

/~t p = Yt - Wt p - Gt - T, + St = I, , (4)

where: /(P = I t is investment or growth of capital stock; Yt is real production - aKPt, a is an input-output coefficient; WtP is the wage mass (payroll) paid by private sector, WtP > 0; G t is non-retained earnings in private firms or dividends; S t is transfers of state-run firms.

Finally, state-run f irms' role in promoting private entrepreneurial activities necessitates one transition equation more. Government transfers granted by this channel are an outflow for state-run firms, which in part is compensated by credits acquired in international markets.

State-owned f irms' accumulation:

/~,~ = Y,° - W, ° - St + Or, (5)

where Yt G is production of the period = qKt ~, q is an input-output coefficient; W 9 is state-owned firms' payroll; D t = dK~ is net flow of external debt contracted in the period, d is an exogenous parameter determined by foreign banks.

4.2. Workers' problem

As mentioned above, 'official unions' also pursue genuine workers ' demands: wages and fringe benefits; since they get their strength from the rank and file. Here it is assumed that total federal expenditure is devoted to services for workers. The utility function to be maximized by workers, assuming that they do not save, is given as

oQ Or

uW = ~o f ~ [mbt + (1 - m)Wt]~'~-l)A~)e-*tdt, (6)

12 Obviously, this expression only represents the socioeconomic legitimacy of the government; leaving aside issues related to ideological and political legitimacy. The legitimacy constraint is not written just as the ratio of wages and profits, since the well-being (represented by the utility function) is what really matters to social actors. Wages and profits are only one part of the arguments of the corresponding utility functions.

298 G. Castaheda /European Journal of Political Economy 11 (1995) 291-316

where: W t = Wt G + WtP, i.e. 'total wages' is defined as a sum of wages from both firms: state-run and private; m is a parameter weighting social well-being in workers' objectives, 0 ~< m < 1. As mentioned above, 'official unions' are subordinated to the government's will in many respects; thus the leadership of the State is heavily influential in determining the parameter m; when m tends to one, unions are completely subordinated - given that the objectives between union bureau- cracy and government coincide. This does not mean that government has the capacity to manipulate, period by period, the value of m according to its wishes; on the contrary, this parameter is part of the initial rules of the game.

Workers' unions are also aware of the capital accumulation process but, despite having control over the wages' share of the national product, they do not have control over the balance; that is, differential equations (4) and (5) are also part of the set of restrictions for organized workers.

4.3. Entrepreneurs ' problem

Capitalists maximize their intertemporal consumption defined by

U c = fo~o .~ 1 C } ~ - l ) / ~ e - ~ t d t , (7)

where: C t is instantaneous consumption for entrepreneurial groups, C t > 0. Once wages' shares in the product and tax payments are defined, the balance is

controlled by capitalists, who decide the amount retained for firms' investments, as well as how to split dividends between consumption and investment abroad; hence, besides considering the internal capital accumulation restriction (4), entrepreneurs' problem requires transition equation. 13

External accumulation:

l~t = r f t -l- Gt - Ct,

modeling capitalists' investments with another

(8) where F t is capitalists' external savings, for simplicity, initial savings are assumed null, i.e., F 0 = 0; r is the rate of return for external investment.

In the model the possibility of jumps in the stock variables is ruled out, therefore K p and F, are continuous time functions where the following condition holds:

Feasibility condition:

K• 0~< K---~ ~< 0', (9)

13 A generalized strike would be the corresponding pressure mechanism for organized workers. This is not included in the model since such measures never took place in the period of analysis.

G. C astaheda /European Journal of Political Economy 11 (1995) 291-316 299

where 0 and 0' are bounds for the rate of investment; when the rate reaches the superior bound, entrepreneurs' expectations are optimistic but they are pessimistic if the opposite bound is reached.

Information structure: If a closed information structure is assumed (closed- loop), where control variables are a function of a contemporaneous state variable, then the decision rules are defined as follows:

w, ° = 13

WtP = 13 PKPt,

G t = otK p,

r , = ,

S t = sK y, (10)

where: 13 c, 13 p, (~, r, s are parameters to be determined optimally. Considering certain labor mobility, wage rates in state-run and private firms move in parallel fashion. Here the assumption is taken to the extreme so that both wage rates are identical, i.e. 13 G = 13 p = 13.

5 . I n t e r i o r s o l u t i o n

First, it will be assumed that the government's legitimacy constraint holds with a slack. Consequently, each actor's best response is derived by solving the corresponding Hamiltonian equation and after some algebraic manipulations, the following expressions are obtained for the Nash-perfect equilibrium: 14

o r = a - q - d ,

r = a + s - 1 3 - . r ,

( [n,+(l-n)]

- s ( 1 - r / )

= [m~'+ (1 - m)131

(( [ 2 m - 1 X a - 1 3 - a - ~ ' + s ) - c r 1 - m

- s ( 1 -m)13

(11) (12)

- - + a - f l - o t - ~ ] }

(13)

14 Mathematical procedures are detailed in Appendix A.


and

= ( 1 - m ) f l o- 1 - m r - a - 6 + a + f l - q - d . (14)

The model assumes that a > r, that is, investment return within the country is higher than abroad. Moreover, it is assumed that a > q + d, therefore, private f irms' productivity is greater than the capacity for generating resources by state-owned firms (in terms of productivity and external indebtedness), x5 This assumption only implies that the optimal dividend rate must be positive ( a > 0).

The unknowns to be solved in the system (11)-(14) are a , fl, r , s. Despite dealing with a nonlinear system, and the possibility of multiple equilibria, the repetitive nature of the game could help players to reach a consensus with regard to the unity of the Nash equilibrium. Without resorting to numerical simulation, it is possible to make some interesting interpretations of these results.

Proposition 1. The rate of dividends, or non-retained earnings, does not depend on the degree of unions' subordination (value of m) nor on the weight given by the State to its attributes as a social benefactor (value of ~1).

This result is derived directly from Eq. (11); the optimal rate of dividends (a ) depends exclusively on productivity and on the rate of external indebtedness, since for the government, shadow prices (or marginal utilities) for capital growth in the private sector or state-owned firms are identical - see Appendix A. Intuitively, this means that entrepreneurs are aware that government satisfaction will not change when transfers from state-owned firms increase, therefore, the private sector is not worried about the influence of tax and wage policies (the value of m and h) on private capital accumulation. The existence of state-run firms and their transfer mechanism assures entrepreneurs a policy of input prices inclined to sustain private sector accumulation.

Proposition 2. A larger capacity for generating resources in state-run firms, either internal (q) or external (d), encourages the private sector to retain a larger amount of earnings in the firms. 16

15 These two assumptions are required to fulfill transversality conditions, see Appendix A. 16 Throughout all these years, expansion of government expenditures assigned to productive infras-

tructure (e.g. dams, roads, some state-run firms) went along with an accelerated accumulation of capital in the private sector. Expansion of public investment produced a positive effect on private investment (or crowding-in).


This proposition also comes from Eq. (11). The greater the possibility of state-run firms to generate resources, the larger the amount of transfers given to private firms. They can then compensate the negative effects of taxes and salaries on accumulation. Accordingly, entrepreneurs will only assign the 'non-protected' portion of their production to dividends.

Proposition 3. Tax policy and government transfers are addressed to maintain investment returns within the country competitive with those existing abroad. 17

From Eq. (12) it is easy to appreciate that as long as the external rate of return ( r ) is higher than the internal rate of return, from the capitalists' point of view (a - / 3 ) , the optimal strategy for the government will consist of granting a positive amount of net subsidies (s - I-).

Having obtained the optimal values of endogenous parameters involved in decision rules, the next step is defining the path for state variables: internal private capital (KP), state-owned firms capital (Kt G) and external private capital ( F ) . From Eqs. (4), (11) and (12) the following expression is derived:

Internal accumulation o f private capital:

I(Pt = ( r - a + q + d)KPt (15)

whose solution is

KPt = g P e (r-a*q*d)t (16)

Proposition 4. The rate o f growth of private capital stock within the country depends, exclusively, on the difference between external interest rate ( r ) and the optimal dividends rate. This latter is equal to the difference between the capacity to generate resources for private and state-run f irms ( a = a - q - d).

This result is a logical conclusion of Proposition 1, since the degree of subordination by 'official unions' and the social inclination of the State do not have any influence on the amount retained by finns. In order to determine the evolution of capital stock abroad, it is first necessary to find the path of capitalist consumption. Using transition equations (4) and (8), the optimal consumption

17 The fiscal burden as well as real prices of goods offered by state-run finns were kept depressed until the De la Madrid Administration. According to the model, this would explain wage increases higher than productivity growth during the 'Stabilizing Development' period, and the high external rates of interest due to devaluatory expectations during the presidencies of Echeverrla and L6pez Portillo. In both cases the government's objective was to compensate for the loss of profitability of private investment within the country. The policy was totally reversed in the six-year term of De la Madrid. The high degree to which the peso was undervalued and the abrupt fall in real wages were compatible with the reversion process observed in the fiscal policy.


condition (see Appendix A) and the relationship C t = ~ ( K p + F t) make it possible to find the value of ~ by means of the method of indeterminate coefficients.

Capitalist consumption rate:

~= r(1 - o-) + o-6. (17)

Hence, private accumulation abroad is derived from (11), (17) and differential equation (8).

External capital accumulation:

17 t = o- (r - 6 ) F t + [a - q - d - r(1 - or) - o '6]K p (18)

the solution of which is

F t = {e "(r-*)t - e(r-a+q+d)t}K p. (19)

Proposition 5. In this political-economic structure there will be capital flight as long as o - ( r - 6 ) > r - a + q + d . 18

This statement comes from Eq. (19), which has a very intuitive explanation. Recalling that the dividends rate in the economy is equal to c~ = a - q - d, that the consumption rate is equal to ~= r ( 1 - o - )+ o'6, and since all assigned dividends which are not consumed must be invested abroad, there will be an outflow of capital if o~ > ~; an expression equivalent to the one mentioned in the proposition. 19

Proposition 6. External indebtedness o f state-owned firms is explained in terms o f its capacity to promote internal accumulation within the private sector and to reduce capital flight.

According to Propositions 2, 4 and 5, the rate of external indebtedness contributes, via transfers to state-run firms, to the compensation of private capital losses originated by labor costs and taxes. Therefore, entrepreneurs are assured the profit margins necessary to increase internal production. Furthermore, with a lower dividends rate, the amount to be invested abroad after consumption will be smaller.

is During this period, capitalists kept their threat of capital expatriation as a weapon to enhance their position in the fight to obtain privileges within the dominant block; on several occasions these threats became a reality. This happened when the economic environment (strategies of other players and exogenous parameters) made it impossible to favor the process of internal accumulation. This phenomenon was very common in the 70s and early 80s due to the increase in the profitability of external investment caused by expectations of devaluation.

19 Velasco and Tornell (1990) also explain, although in a different setting, the existence of capital flight as a result of the dynamic inefficiency of capitalism.


Overall capital stock growth for the structure under analysis is defined using those expressions employed for the derivation of (13) and (14) (see Appendix A).

Capital accumulation in the economy:

( A [ m ~ + ( l - m ) f l ] }Ktp Kt= KP -~- K G= I "F -'~ -'-I~S ~

where

A =

(20)

2 m - 1 a - f l - a - z + s - o - 1 - m

(1 - m ) f l s

a - 6 - a - m ~ - + ( 1 - m ) / 3

] [ 1 - m r - c ~ - 6 + a + [ 3 - q - d

and substituting (16):

K , ( l + a [ m ~ + ( 1 - m ) f l ] }gPe ( r - a + q + d ) ' . - ~ - - m 5 ~ (21)

Proposition 7. Although the rate of growth of overall capital is influenced by the same parameters as those affecting private accumulation, the level of the overall stock depends as much on the private sector's subjective variables ( o- , ~ ), as on the institutional arrangements defined by the State: union subordination (m) and social inclination (71).

n t ~ - -

where

When substituting state variables paths (16), (19) and (21) in the definition of legitimacy, presented in Eq. (3), the next expression follows:

Evolution of legitimacy: U, c

= H * e {~{r- ~ ) - r + a - q - d } t ( 2 2 ) U, w

H * -m-

r(1 - o-) + o'6

[ m r + (1 - m)fl] (1 + A )

Proposition 8. When there is capital flight, the political-economic structure tends to be delegitimized through time That is, there is a dynamic process of deterioration in the distribution of welfare, favoring the capitalist group.

From Eq. (22) it is easy to appreciate that H t grows with time as long as F t > 0. Although those variables under government control cannot affect the rate at

304 G. Casta~eda /European Journal of Political Economy 11 (1995) 291-316

which the distr ibution worsens, it is possible for the government to inf luence the level of relative util i ty (H,) . In order to see the precise relat ionship be tween these variables and H t, some numerica l s imulat ions are needed; nonetheless, certain important results can be seen directly:

Proposition 9. A government with extremely subordinated 'official unions' (m ---> 1), results in a high degree of inequality. 20

This result is derived from (20) and (22). Under these circumstances, wage

demands are not in conflict with the objectives of state-run firms, a l lowing the government to design tax and transfers policies according to the goal of economic growth.

Proposition 10. Larger access to external credit allows the government to retain its legitimacy. 21

From (20) and (22) it is clear that external indebtedness contributes to a reduction in the level of inequal i ty and also to an abatement in the rate of growth. This means that government can keep the existing political order, thus avoiding

the legi t imacy constraint, when there is an increasing access to internat ional f inancial markets.

Proposition 11. The government will always favor external indebtedness when more credit is granted. 22

By insert ing expression (16) into the governmen t ' s utility function, it fol lows that 23

r l r + ( 1 - r D A [ m r + ( 1 - m ) 3 ] + 1 Ko p

U ° = (1 - m ) / 3

o ' - 1 (o ' - 1) 2 - - 6 o . °" a ( r - a + q + d )

20 De ia Madrid's Administration was characterized by a sustained deterioration of relative well-being for workers due, to a large extent, to union subordination; contrary to their predecessors. On the one hand, Echeverrla made room for independent unions, which then restricted government strategies. On the other hand, the oil boom in Lopez-Portillo's tenure strengthened 'official unions'.

21 The painful debt service (in the model represented as a d < 0 and large in magnitude) experienced during the period of De la Madrid, generated economic stagnation, deepened capital flight and precipitated a sustained loss in the government's legitimacy - see Propositions 4, 5 and 8.

2 2 . . . . . . This proposltmn, together wzth Proposition 6 and Proposition 10, suggest that the government favored external indebtedness as a means of boosting growth and legitimacy. In this fashion, it is possible to explain why Echeverria's and Lrpez-Portillo's Administrations, which started with severe problems of legitimacy, were very pleased with the resources offered to them from abroad.

23 It is necessary to assume that [(o- - 1)/o" ] {r - a + q + d} - d < 0, which holds if the transversality condition for the government's problem is met (see Appendix A).

G. Castafieda / European Journal o[ Political Economy 11 (1995) 291-316 305

It can be concluded that the larger the external credit (d), the greater the government well-being.

6. Corner solution

As time proceeds, with the continuous deterioration of the relative well-being of workers, the economy will more likely reach a point where political pressures prevent the further decline in the distribution. When this boundary is reached, the government could keep its legitimacy through external credits; however, when the doors of international financial markets are closed, the system has to operate according to strategies of a comer solution. 24

The comer condition (3) can be rewritten as

H[m'rKPt + (1 - m ) [ 3 ( K t p + KtC)] - ~ [ K p + Ft] = 0 . (23)

Since entrepreneurs' and workers ' problems are not modified, using Eqs. (12), (17) and (20), it is concluded that 25

a = r ( 1 - o ' ) + ~ r 6 = ¢ . (24)

That is, the optimal strategy of the capitalist class consists in the total consumption of assigned dividends. Despite the fact that none of the proceeds from production are invested abroad, external capital can still grow if the interest generated is not completely consumed. In other words, in the comer solution there is no further capital flight, the growth of external investment is due to non-repatri- ated interests. Substituting (24) in differential equation (8), the next expression follows:


Ft = o ' ( r - 6 ) F t (25)

the solution of which is

Ft = Ftoe Cr(r - ~ Xt- to) (26)

24 The feasibility condition (9) produces another kind of comer solution, which deals with entrepreneurs' expectations. In this paper, this issue is set aside since Velasco and Tomell (1990) work out this point in their two-player model. Suffice to say, under a scenario with pessimistic expectations (i.e. when capitalists think that workers will demand wages higher than those of an interior solution), capitalists will proceed to accelerate capital flight, fulfilling their own forecasts and deteriorating the welfare for both social groups.

25 For the mathematical details see Appendix B.


where Fro is the stock of external savings at the moment that the legitimacy constraint is reached. With this equation, it is possible to conclude the next proposition:

Proposition 12. Once the government is forced to halt the deterioration in the distribution of welfare to sustain its legitimacy, capital flight is reduced.

For determining the path of private capital stock, Eq. (4) and optimality conditions (12) and (24) are used:

Internal accumulation of private capital:

K p = KPe~r ( r - 6Xt-to) t t o (27)

where K p is the stock of private capital at the moment that the legitimacy to

constraint is reached.

Proposition 13. When the legitimacy of government reaches its minimum limit, optimal strategies for social actors lead to larger rates of economic growth. 26

In the interior solution, the rate of growth of internal capital for the private sector is: r - a + q + d, in the corner solution this rate is: t r ( r - ~ ) ; consequently, before the system reaches the legitimacy boundary during a process of capital flight, the following condition holds: r - a + q + d < o'(r - ~), which implies that the growth of private capital increases in the comer solution. According to expression (20), the increase is generalized in both types of firms (private and state-run).

When government has the belief that entrepreneurial groups will increase their consumption above that level indicated by the interior solution, government strategy will be modified to sustain the political-economic order. Government policies will be devoted to the encouragement of the private sector to substitute capital flight for internal accumulation. Greater economic growth will enhance the possibility of wealth distribution via wages. In contrast, when government does not fear loss of legitimacy, it is optimal to foster a policy that leads to capital flight and the decapitalization of the country; that is, tax policy will tend to expand social expenditure at the expense of productive expansion. From all these observa- tions another proposition follows:

26 This proposition and the previous one explain, to certain extent, the observed fact at the beginning of the Salinas Administration. The government had to face a complete lack of legitimacy, since the relative poverty of workers had apparently bottomed out. Therefore, the Administration had to rethink its austerity measures, boosting growth by encouraging entrepreneurs to repatriate their capital.

G. Castaheda / European Journal of Political Economy I1 (1995) 291-316 307

Proposition 14. Under this political-economic structure, when there is not a legitimacy problem Onterior solution), government policies are 'populist' in the sense that they promote social expenditure but actually result in a relative deterioration in the welfare of workers. 27

7. A possible crackdown in the political order

Next, the model will be modif ied to consider uncertainty on the part of capitalists with regard to the stability of the political order. Entrepreneurs doubt the permanence of the rules of the game, assigning an instant probabili ty (Tr) that these will be violated. In particular, it is assumed that the rules are violated by restraining the consumption of capitalists. The breaking of the institutions is the result of pressures exerted by exogenous actors, e.g. opposit ion parties, peasants, independent unions, external actors, etc. The probabili ty can also be understood as the possibil i ty of breaking apart the cohesiveness of entrepreneurs as a group. The loss in articulation will hinder capitalists from reaching the goals they established as a coordinated group. In order to keep the model tractable, randomness will be introduced assuming that the horizon of the structure does not depend on the time the system has been functioning. 28

Therefore, the objective function to be maximized by the entrepreneurial group under conditions of uncertainty is the following: 29

O" E U e = C~ ~" a)/~e ( ~ + 8 ) t + ( O C t ) ( ~ - l ) / ~ ( 1 - e - ~ t ) e - ~ t dt

t r - 1

(30)

where 0 ~< ~b ~< 1, ~b is an exogenous parameter which, as mentioned above, places a constraint on capitalist consumption.

As can be seen from the previous expression, when 7r---)0, the capitalists ' objective function coincides with the certainty case, where rules are never violated.

27 This proposition explains the 'populist' episodes during Echeverria's and L6pez-Portillo's Admin- istrations. When resources were coming from abroad, the government had the possibility of sustaining its legitimacy and of continuing its populist stance. That is, although the government was able to momentarily improve the relative distribution of welfare with external credit, in a framework of rational agents reacting to the signals of the system, the policy of social expenditure generated, in the end, continuous poverty for the masses.

28 This methodology is taken from the models of overlapping generations known as 'models of eternal youth' -see Blanchard and Fischer (1989).

29 The random variable X - distributed as an exponential - is defined as the time that lasts until the rules of the game are broken


Since the problems of the government and the workers are not modified, in order to find the equilibrium, it is sufficient to redefine the Hamiltonian for the capitalist class. To ease the algebra an extreme scenario is assumed, where capitalists are not allowed to consume when the political order is broken, i.e., ~b = 0. Hence the only modifications to the game with certainty are the following:

Capitalist consumption:

Ct= [ r ( 1 - tr) + tr( 6+ Ir)][KP + Ft]; (17 ' )


F t = {e °'(r- 6- 7r)t - e(r-a+q+d)t}KP; (18 ' )

Instantaneous relative utility:

U~C = H* e 0 r ( r - ' ~ - lr ) - r + a - q - d } t (22 ' ) ~w n t • i

where

H* = r ( 1 - o ' ) + o r ( a + 7r)

[ m ' r + ( 1 - m ) t ~ ] ( l + A )

Proposition 15. When exogenous social actors exert a greater pressure to limit the privileges of the capitalist class, or when the unity of the entrepreneurial class cracks, the political-economic structure will have fewer problems with regard to capital flight and the relative impoverishment of workers. 30

According to (18'), capital flight will appear when t r ( r - 6 - 7r) > r - a + q + d, thus the greater the probabili ty of polarization within the entrepreneurial class (greater 7r), the slower the process of capital flight. 31 Nevertheless, the rate of growth of private capital within the country is not modified ( r - a + q + d), and therefore, entrepreneurs are inclined to increase their consumption rate as long as the breaking of the rules does not occur - see Eq. (17').

On the other hand, according to (22'), the possibil i ty of a dark future for capitalists will, at first, diminish the relative welfare for workers ( H * ) , but consequently slows down the dynamic of impoverishment. Undoubtedly these

30 It was not only the lack of legitimacy that led Salinas's government to change its strategies, but also the pressure of exogenous actors, disputing the permanence of the system, who convinced the government and entrepreneurs alike to design strategies more conducive to equity and growth.

31 Undoubtedly, capital flight will increase when there is macroeconomic instability. However, in this model a case is considered where capitalists are aware that in the future they will have fewer privileges, and that there is nothing they can do about it.

G. Castaheda / European Journal of Political Economy II (1995)291-316 309

results come from a particular case of rules violation: limits to consumption for capitalists. 32

8. Conclusions

The model of Game Theory developed in this paper offers a rational explanation for a series of stylized facts observed in Mexico during the period 1940-1988. Political decisions that apparently did not make economic sense, did have a high degree of rationality if considered in their political context alone. For instance, external indebtedness despite having permanent repercussions, allowed the government to keep its legitimacy within the dominant block. On the other hand, the model explains some government decisions that were reasonable within the Mexican context, but perhaps not in other socio-economic structures. The undeni- able pressure of the capitalists groups was crucial in determining the equilibrium strategies and helped to explain the low tax burdens and the policy of subsidized prices. When confronting the threat of capital flight, the government accepted these measures in order to sustain the profitability of investment in the country. The swings in policies implemented by different administrations, moving from one side of the political spectrum to the other, are explained in the model not as a consequence of the ideology of the president of the moment, but as a result of the political-economic environment of the period.

Finally, the model takes the structure (rules of the game) as a given, thus it is not capable of explaining how the results of the game affect power relationships, and consequently cannot explain the about face of recent economic reforms: privatization, opening to external markets and so forth. Furthermore, in this paper, attention has focused on the compatibility of stylized facts and observed behavior; however, for a formal empirical verification, further econometric tests are needed.

Appendix A: Interior solution

Government's Hamiltonian

H G = e-8t or o r - 1 [rITt + ( 1 - rl)(Kt~ + KP)]('~-I)/'~

+ hPt[(a- f l - a)KPt + S , - It] + a ? [ ( q + d - f l ) K ? - S , ] .

(A.1)

32 Other interesting types of violations would be: government expropriation of a fraction of private capital stock, or privatization of state-owned firms.


First-order conditions 33 - For control variables (Tt, St):

aH 0

av,

OH o - - = o - - = o .

OS t

- For state variables ( K p, K~):

OH G

aKy

= 0 e- at[r/Tt + (1 r / ) (Kt G +KtP)] - 1 / ' - - =~ -- r/-- At p = 0, (A.2)

(A.3)

= e- at[r/Tt + (1 - n ) ( K ? +KtP)]-1/o- (1 - ~) + AtP( a - / 3 - or),

(A.4)

aH o

- ~ ' t G = OK? =*' - ~p

= e- 8t[r/Tt + ( 1 - r / ) ( K ? + K P ) ] - 1 / o (1 -- 7/) + AtG( q + d - / 3 ).

(A.5)

Using (A.2), (A.4) and the derivative of (A.2) with respect to time:

[ l - r / + a - / 3 - c ~ - 8 ] t r ( r / T t + (1 - r / )Kt) . r/L + ( 1 - r / ) / ( ' r/

(A.6)

From (A.3) it is known that A p = Ao (i.e., marginal utilities for private and public investment are identical) which from (A.4) and (A.5) imply that the next condition must be met:

ce = a - q - d. (A.7)

Workers' Hamiltonian

o H W = e -at [ m ~ - K t O + ( 1 - m ) ( W t O + W t p ) ] ( ' - ' ) / '~

o ' - - 1

+ 7~[ (a - a - ~ ' + s ) K t p - VCfl] + 7 g [ ( q + d ) K t G - s K ~ - Wt°].

(A.8)

33 The first-order conditions are also sufficient given the functional forms assumed in this case.

G. Castaheda / European Journal o f Polit ical Economy 11 (1995) 291 -316 3 1 1

First-order conditions - For control variables (Wt v, Wt°):

bH---ww = 0 ~ e - O t [ mzKp + (1 - m)(Wt ~ + WtP)]-1/ , , (1 - m) - TP o ~ p

OH w

0W, ~

= 0 ,

- - = 0 , e - O r [ m~'K p + (1 - m)(Wt p + W t 6 ) ] - ' / ' ~ (1 - m) - yt ~

(A.9)

= 0 . ( A . 1 0 )

- For state variables ( K p, Kt°):

0H w - ~ ? = _ _ = _ ~?

OKp

= e-Ot[m~'Kp + (1 - m)Wt] -X/"m~'+ y P ( a - ot - "r+ s) - ytOs,

(A.11)

OH w - 3 '~ = 0K---~ ~ - ~ /? = ( q + d ) y ? . ( A . 1 2 )

From (A.9) and (A.10) it is known y p = y ~, and using (A.9), (A.11) and the derivative with respect to time of (A.9) it follows that ( m-i /

m r / ~ p + ( 1 - m ) l / V , = i ---m- r - a - 6 + a 0-[mrKp + ( 1 - m ) W t ] .

(A.13)

Capitalists' Hamiltonian

O r

H e = e - O t o ' - - 1

+ e;[O'K p - I t ] + et[I t - OKp].

The interior solution requires that e~ = e t = 0.

First-order conditions - For control variables (C t, It):

0H c - - " = 0 ~ e - ~ t C t 1/'~ - qbt = O, OCt

OH ~ - - -~ O =:~ ldb t - - f~ t -~ O . oi,

C } ° - l ) / ° + ixtlt + dPt[ rFt + ( a - fl - ~" + s ) K p - I t - C,]

(A.14)

(A.15)

(A.16)

312 G. Castaheda /European Journal of Political Economy I1 (1995) 291-316

- For state variables ( K P t , 17,):

aH c - / z , = - - ~ - /x t = qb t ( a - f l - r + s ) , (A.17) OKF

0H c - q~, = - - = - q~t = et r. (A. lS) OF,

Defining et, t = et e~t and /xt, t =/zte ~t and using (A.17) and (A.18) the next expressions are obtained:

- ~ t , , = ckt , , ( a - f l - r + s ) - I z t , , 6 , (A.19)

~,,t = ~bt,t( 6 - r ) . (A.20)

The derivation of (A.15) with respect to time and combining this result with (A.15) and (A.20) then

C, = o - C , ( r - 6).

From (A.16) and (A.19) it follows that

~l,t -~- ~)l,t( [3 "~- T ~- ~ -- a - s ) .

Comparing (A.22) and (A.20) one can deduce that

r = a + s - f l - r .

(A.21)

(A.22)

(A.23)

O p t i m a l v a l u e s f o r a , f l , r , s

So far two equations have been found - (A.7) and (A.23) - which define the parameters related to the decision rules as a function of exogenous parameters; to find the other two remaining equations the following expressions will be used: (A.6) and (A.13), decision rules (10) and transition equations (4) and (5). Hence, the optimality conditions for government and workers are, respectively,

- - + a n r + (1 - r/)] a - f l - a - r + s - o - r/

- s ( 1 - ~ ) )K~

{ I I - r / + a - f l - a - 6 1 o - + t S - q - d } K t C, = ( 1 - rl) 71 (A.24)


(, ,( (2m ]} m r + ( 1 - m ) [ 3 a - f l - a - r + s - o " 1 - m r - o t - 6 + a

- ( 1 - m ) j S s ) K p

( [2m-1.17£m ] } = ( 1 - m ) / 3 { o r [ r - a - a + a + f l - q - d Kt a. (A.25)

By equating the coefficients corresponding to each stock of capital in (A.24) and (A.25), Eqs. (13) and (14) of the main text are obtained. 34 From expression (A.25), one can obtain the value of private capital stock within the country as a function of state-run firms' capital stock.

Transversality conditions.

A. For workers Using (16) and (A.12),

l imKPy p = lira p p e (r-a)t Y0K0 = 0 ~ r - a < 0.

Using (16), (A.12) and (A.25)

a [ m r + ( 1 - m ) f l ] l imK~yt ~ = lim YoCKg e (r-a)t = 0 ~ r - a < O, , - ~ t ~ (1 - m ) f l

(A.26)

(A.27)

where the value of A is presented in the main text.

B. For the government Using (16) and (A.2),

limT/[~r! + ( 1 - r/)[l Atm~" + (1- m)f l ] IimKPAP = , " * ~ t"-, [ (I - m ) f l

X [K0P] (~r-l)/~r e [[('r-1)/~r](r-a+q+d)-a]t,

o - - 1 limKPA p = 0 ~ ( r - a + q + d) - ~ < 0. t--* oe o r

+,}]- 1 / o "

(A.28)

34 In order for the Eqs. (A.24) and (A.25) to be compatible, the ratios KP/K~ of each equation have to be solved and later equated. For the problem to have a solution, two more equations are needed, in addition to (A.7) and (A.13). Therefore, one must equate the coefficients in (A.24) and (A.25).

3 1 4 G. Castaheda / European Journal o f Political Economy 11 U995)291-316

Using (16), (A.2) and (A.3),

A [ m r + ( 1 - m ) f l ] limK~A~ = lim KPA p t--,~ t--,~ (1 - m ) f l

o - - 1 = O ~ - - ( r - a + q + d ) - 6 < 0 .

O"

(A.29)

C. For capitalists Using (16), (A.16) and (A.20)

limKPtxt = lim/zl,0K0 p e ( q + d - a ) t = 0 ~ q + d - a < 0. (A.30) t--.~ oo t.--~ o~

Using (17), (19) and (A.20),

limFt~b , = limKPqS~,o[e~'~¢- l)-¢8)t - e ( q + d - a ) t ] = 0 ~ d + q - a < O. t--~ oo t"~ ~

(A.31)

A p p e n d i x B: C o r n e r so lu t ion

From the corner solution, Eq. (23), keeping in mind that the workers' problem has not been altered, and Eq. (A.25) is maintained, the next expression follows:

H(1 +A)[m~-+ (1 - m ) f l ] - F t = L K p where L = (B.1)

The value of A, although defined in the text (see Eq. (20)) as a part of an interior solution, is also valid for the corner solution since it comes from the workers' problem.

Using transition equation (8), the definition of consumption, C t = ( ( K p + F t)

and (B.1), the following differential equation is obtained:

rL + a - ~r(1 + L ) /¢t p = K p. (B.2)

L

On the other hand, since the capitalists' problem was not modified either, condition (A.23) is also valid in the comer solution. Combining this expression with transition equation (4) the following differential equation is obtained:

/~t p = ( r - ot)K p. (B.3)

In order to make Eqs. (B.2) and (B.3) compatible, it is required that

a = s c ( B . 4 )

G. Castaheda /European Journal of Political Economy 11 (1995) 291-316 315

where ~ = r(1 - ~r) + ~r6, according to the solution of the capitalists' problem - see Eq. (17).

Therefore, the Hamiltonian for the government in the case of a comer solution is the following:

H G's'E = H G + p,[ H{mT, + ( 1 - m ) f l ( K P t + K t ~ ) } - ~'(1 + L ) K r ]

(B.5)

where /_/o is Eq. (A.1). Besides the comer condition referred to in the text with number (23), the equations which are modified with relation to the government's problem in Appendix A, are: (A.2), (A.4) and (A.5) which in this case correspond, respectively, to:

oHG,S,E - - = O = e - ~ t [ ' q T t + ( 1 - ~ l ) K t ] - l / ' ~ r l - h P t + p t H m = O , (B.6) OT t

0HG,S.E _ = _ _ _

0KP

= e-8'[rITt + (1 - r l ) r , ] -1 / ' ~ (1 - r/) + AP(a - 13- a )

+ pt[H(1 - m) f l - ~'(1 + L ) ] (B.7)

OH o - X? = FOK-----If" = - io

e-~t[rlTt + (1 - ~ ) ( K t G +KtP)] -1/'~ (1 - 77)

+ h~(q + d - / 3 ) + p t H ( 1 - m ) f l . (B.8)

Working with these obtained:

r/L + (1 - r/)/( , = or [ "q Z t "b (1 - - 'rl ) g t ] ( a - / 3 - a - 3 + R + - -

where

H ( 1 - m ) f l - if(1 + L ) ( a - o~- q - d ) R =

C ( I + L )

a - o t - q - d D = 1 - H m , (B.9)

~'(1 + L )

which is the equivalent to Eq. (A.6) in the interior solution. For the comer solution, the optimal values for or, ]3, % s are obtained from

Eqs. (A.23), (A.25), (B.4) and (B.9).

equations and with (A.3), the following expression is


References

Aguilar-Camln, H., 1990, Despu6s del milagro (Cal y Arena, M6xico). Aguilar-Camln, H. and L. Meyer, 1991, A la sombra de la revoluci6n Mexicana (Cal y Arena,

Mexico). Basafiez, M., 1990a, El pulso de los sexenios, 20 afios de crisis en M6xico (Siglo Veintiuno Editores,

Mexico). Basafiez, M., 1990b, La lucha por la hegemonia en M6xico 1968-1990 (Siglo Veintiuno Editores,

Mexico). Bizberg, I., 1990, Estado y sindicalismo en M~xico (El Colegio de M6xico, Mexico). Blanchard, O. and S. Fischer, 1989, Lectures on macroeconomics (MIT Press, Cambridge, MA). Camp, R., 1989, Entrepreneurs and politics in twentieth century Mexico (Oxford University Press, New

York). C6rdova, A., 1989, La revoluci6n y el estado en M6xico (Ediciones Era, Mexico). Coslo-Villegas, D., 1973, El sistema politico Mexicano (Joaquin Mortiz Editores, Mexico). Cypher, J., 1990, State and capital in Mexico: Development policy since 1940 (Westview Press,

Boulder, CO). Gradus, R., 1988, The reaction of the firm on govemamental policy: A game-theoretical approach, in:

G. Feichtinger, ed., Optimal control theory and economic analysis, Vol. 3 (North-Holland, Amsterdam) 265-290.

Gradus, R., 1990, Optimal dynamic taxation with respect to finns, in: N.M. Christodoulakis, ed., Dynamic model and control of national economies (Pergamon Press, Oxford).

Gradus, R. and A. de Zeeuw, 1990, Corporate tax rate policy and public and private employment, in: N.M. Christodoulakis, ed., Dynamic model and control of national economies (Pergamon Press, Oxford).

Hamilton, N., 1983, M~xico: Los llmites de la autonomia del estado (Ediciones Era, Mexico). Lancaster, K., 1973, The dynamic inefficiency of capitalism, Journal of Political Economy 81,

1092-1109. Levy, S. and C. Bazdresch, 1991, Populism and economic policy in Mexico 1970-1982, in: R.

Dornbusch and S. Edwards, eds., The macroeconomics of populism in Latin America (The University of Chicago Press, Chicago, IL).

Persson, T. and G. Tabellini, 1990, Macroeconomic policy, credibility and Politics (Harwood Aca- demic Publishers, Suiza).

Rodrlguez-Araujo, O., 1988, M~xico: Estabilidad y luchas por la democracia 1900-1982 (CIDE y Ediciones el Caballito, Mexico).

Teichman, J., 1988, Policymaking in Mexico, from boom to crisis (Allen and Unwin, Boston, MA). Tirole, J., 1988, The theory of industrial organization (MIT Press, Cambridge, MA) Trejo R., 1990, Cr6nica del Sindicalismo en M6xico 1976-1988 (Siglo Veintiuno Editores, Mexico). Saldlvar, A., 1988, Ideologla y polltica del estado Mexicano (Siglo Veintiuno Editores, M6xico). Velasco, A. and A. Tornell, 1990, Salarios, utilidades y fuga de capitales, Colecci6n de Estudios

Cieplan 8, 9-27. Zazueta, C. and R. de la Pefia, 1984, La estructura del congreso del trabajo, estado, Trabajo y capital en

M6xico: Un acercamiento al tema (Fondo de Cultura Econ6mica, Mexico).

Documents

The political economy of Mexico, 1940–1988: A game theoretical view