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 deprec

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126). Economic Status The Mexican financial crash in late-1994 had dramatic effects on four of the country's macroeconomic measures�GDP, consumer prices, unemployment, and balance of payments. The effects of the crash on these four variables are illustrated in Charts 1 through 4, which may be found on the next few pages. As the data presented in Chart 1 [on the following page] indicate, Mexico's GDP plummeted in the year following the financial crash. Early data for 1996, as indicated in the chart, reflects the beginning of a recovery for Mexican GDP. Chart 1 Change in Mexican GDP: 1990-1996 ________________________________________________________________ % Change + 6 + 4 + 2 0 - 2 - 4 - 6 1990 1991 1992 1993 1994 1995 1996 [Source: "Emerging Market Indicators: Mexico" 1998; 1995] ________________________________________________________________ As the data presented in Chart 2 [see following page] indicate, consumer prices in Mexico skyrocketed in the year following the financial crash. Early data for 1996 reflects a continued increase in Mexican consumer prices, although the rate of increase appears to be moderating to some extent. As the data presented in Chart 3 [see page 7] i

Category: Foreign - M