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Mexico's Economic Crisis

This research examines the economic crisis in Mexico. A brief history of the crisis, a review of the statistics reflecting the current status of the country's economy, and potential solutions are presented.

The most traumatic economic event afflicting Mexico over the past five years has been the peso crisis that struck in 1994. The events that led to the peso crisis, however, began to emerge in the 1980s. Therefore, this brief history of the crisis begins with these earlier developments and proceeds through the peso crisis of 1994 and its aftermath.

A major economic development in Mexico prior to 1990 was the emergence of the country's huge external debt in the early 1980s. A large proportion of the foreign borrowing in which Mexico engaged in the late-1970s and early-1980s "was wasteful or unjustified in that it primarily financed consumption and government budget deficits rather than investment" (Dornbusch & Fischer, 1986). A substantial proportion of the increase in Mexico's external debt during this period was linked to an exodus of capital by residents of Mexico. Between 1979 and 1982, the estimate of capital flight from Mexico precipitated by residents of the country was US$30 billion (Dornbusch & Fischer, 1986).

As a consequence of the debt crisis accompanies by capital flight, the Mexican government resorted to "inflationary finance"·printing money (Dornbusch & Fischer, 1986). In turn, the Mexican peso experienced a huge depreciation in real terms from 1982 to 1986·28 percent. This real currency depreciation caused real wage levels in Mexico to plunge, which, in turn, prompted multinational corporations (MNCs) to attempt to establish bases of production in the country to exploit the low real wage levels (Dornbusch & Fischer, 1986).

From 1982 to 1986, the Mexican government reduced expenditures and raised taxes to be able to pay the interest on the country's external debt. As a consequence, real wage level...

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Mexico's Economic Crisis. (1969, December 31). In LotsofEssays.com. Retrieved 09:42, March 29, 2024, from https://www.lotsofessays.com/viewpaper/1694758.html