Jason Levin, Josh Love, Mikaela Bloomberg, Faisal Akermann, Ashley DeCleene, Sabrina Chan, Beth Tilstra, Peter Abraldes

Population and Composition Mexico is a federation comprising thirty-one states and a Federal District, the capital city. Mexico is located in North America, between the United States to the north and the Central American countries of Belize and Guatemala to the south. It is approximately three times the size of Texas, with a total landmass of 1,972,550 square miles.Mexico is the fifth-largest country in the Americas Population: 109 Million People 11 th Most Populous Nation in the World

Mexico is a federation comprising thirty-one states and a Federal District, the capital city.

Mexico is located in North America, between the United States to the north and the Central American countries of Belize and Guatemala to the south. It is approximately three times the size of Texas, with a total landmass of 1,972,550 square miles.Mexico is the fifth-largest country in the Americas

Population:

109 Million People

11 th Most Populous Nation in the World

History Mexico is the birthplace of the Aztec civilization, which ruled the country from approximately the 12th century until the beginning of the 16th century. The Spanish conquered the Aztecs in 1521, subjecting Mexico to 300 years of colonial rule. Mexico City is the political, cultural and industrial capital of Mexico. It is the oldest city in North America, situated on top of the former capital of the Aztec kingdom, Tenochtitlán. Mexico City is the world's third-largest city, after Tokyo, Japan, and Sao Paulo, Brazil, with an estimated population of 18 million .

Mexico is the birthplace of the Aztec civilization, which ruled the country from approximately the 12th century until the beginning of the 16th century. The Spanish conquered the Aztecs in 1521, subjecting Mexico to 300 years of colonial rule.

Mexico City is the political, cultural and industrial capital of Mexico. It is the oldest city in North America, situated on top of the former capital of the Aztec kingdom, Tenochtitlán. Mexico City is the world's third-largest city, after Tokyo, Japan, and Sao Paulo, Brazil, with an estimated population of 18 million .

The Modern Mexican State & Economy Mexico gained its independence in September, 1821. The 30 year reign of President Diaz ended in 1910 with the Mexican Revolution which established the modern Mexican State. Mexico, like much of Latin America has been classified as an upper middle income country. The elections held in 2000 marked the first time since the 1910 Mexican Revolution that an opposition candidate – Vicente Fox, defeated the party in government, the Institutional Revolutionary Party (PRI). He was succeeded in 2006 by another PAN candidate Felipe Calderon. In the last year the news from Mexico has been dominated by the violent stand off between drug cartels in the North and the Mexican authorities.

Mexico gained its independence in September, 1821.

The 30 year reign of President Diaz ended in 1910 with the Mexican Revolution which established the modern Mexican State.

Mexico, like much of Latin America has been classified as an upper middle income country.

The elections held in 2000 marked the first time since the 1910 Mexican Revolution that an opposition candidate – Vicente Fox, defeated the party in government, the Institutional Revolutionary Party (PRI). He was succeeded in 2006 by another PAN candidate Felipe Calderon.

In the last year the news from Mexico has been dominated by the violent stand off between drug cartels in the North and the Mexican authorities.

Economic Overview Mexico has the ninth-largest economy in the world. Its main industries are food and beverages, tobacco, chemicals, iron and steel, petroleum, clothing, motor vehicles, consumer durables, and tourism. It is a major exporter of silver, fruits, vegetables, coffee, cotton, oil and oil products. Mexico's economy has undergone dramatic change in the last decade because of the passage of the North American Free Trade Agreement. Trade with the US and Canada has nearly tripled since the implementation of NAFTA in 1994.

Mexico has the ninth-largest economy in the world. Its main industries are food and beverages, tobacco, chemicals, iron and steel, petroleum, clothing, motor vehicles, consumer durables, and tourism. It is a major exporter of silver, fruits, vegetables, coffee, cotton, oil and oil products.

Mexico's economy has undergone dramatic change in the last decade because of the passage of the North American Free Trade Agreement.

Trade with the US and Canada has nearly tripled since the implementation of NAFTA in 1994.

Cultural Icons Mexico has the largest media industry in Latin America. Traditional music includes Mariachi, Banda, Norteño, Ranchera and Corridos. Some of Mexico’s best known artists include Frida Kahlo and Diego Rivera.

Mexico has the largest media industry in Latin America.

Traditional music includes Mariachi, Banda, Norteño, Ranchera and Corridos.

Some of Mexico’s best known artists include Frida Kahlo and Diego Rivera.

Cuisine Mexican cuisine is known for its intense and varied flavors, colorful decoration, and variety of spices based mostly on pre-Colombian traditions. Typical ingredients include maize, tomato, vanilla, avocado, papaya, pineapple, chili pepper, beans, squash, limes, and sweet potatoes. Mexican dishes that would be most recognizable to America palates include tacos, quesadillas, enchiladas, burritos, tamales and mole among others. Perhaps Mexico’s most important culinary contribution: Chocolate.

Mexican cuisine is known for its intense and varied flavors, colorful decoration, and variety of spices based mostly on pre-Colombian traditions.

Typical ingredients include maize, tomato, vanilla, avocado, papaya, pineapple, chili pepper, beans, squash, limes, and sweet potatoes.

Mexican dishes that would be most recognizable to America palates include tacos, quesadillas, enchiladas, burritos, tamales and mole among others.

Perhaps Mexico’s most important culinary contribution: Chocolate.

Market-led Import Substitution: 1929-32 1929-32: exports decline 64.9% Reduced capacity to import Trade deficit- caused depressive monetary and fiscal effects -Monetary system based on gold/silver without bank bills Outward flow of gold and silver caused international reserves to fall Reduced money supply -1929-32: nominal monetary balances decreased 6.2% and real interest rates increased

1929-32: exports decline 64.9%

Reduced capacity to import

Trade deficit- caused depressive monetary and fiscal effects

-Monetary system based on gold/silver without bank bills

Outward flow of gold and silver caused international reserves to fall

Reduced money supply

-1929-32: nominal monetary balances decreased 6.2% and real interest rates increased

Market-led Import Substitution: 1929-32 Public financing: No access to foreign capital No domestic credit Decrease in fiscal revenues meant decreased public spending 29-32: government spending decreased 23% from 276 million pesos to 212 million pesos Produced small budget surpluses GDP: 29-32: decreased 18% Reduction in industrial outputs reached 31% Unemployment increased while real wages decreased December 1931: Banco de Mexico started issuing bank bills with silver or silver denominated documents (instead of gold)

Public financing:

No access to foreign capital

No domestic credit

Decrease in fiscal revenues meant decreased public spending

29-32: government spending decreased 23% from 276 million pesos to 212 million pesos

Produced small budget surpluses

GDP:

29-32: decreased 18%

Reduction in industrial outputs reached 31%

Unemployment increased while real wages decreased

December 1931: Banco de Mexico started issuing bank bills with silver or silver denominated documents (instead of gold)

Modified Exchange Rate: Long term structural effects caused by reaction to depreciation of exchange rates Mexico, formerly gold standard- but de facto had a bimetallic exchange rate system Domestic transactions largely in silver currency Meant fluctuations in relative prices of gold and silver Price of gold increased relative to silver Silver peso value decreased relative to gold peso “ The change in relative prices brought about by the devaluation of the exchange rate was the major force behind industrial recovery and growth during the first half of the 1930s, which was later reinforced by a new devaluation of the exchange rate in March 1938, and by expansive fiscal and monetary policies that took place in the midst of the Great Depression. ” (179).

Modified Exchange Rate:

Long term structural effects caused by reaction to depreciation of exchange rates

Mexico, formerly gold standard- but de facto had a bimetallic exchange rate system

Domestic transactions largely in silver currency

Meant fluctuations in relative prices of gold and silver

Price of gold increased relative to silver

Silver peso value decreased relative to gold peso

“ The change in relative prices brought about by the devaluation of the exchange rate was the major force behind industrial recovery and growth during the first half of the 1930s, which was later reinforced by a new devaluation of the exchange rate in March 1938, and by expansive fiscal and monetary policies that took place in the midst of the Great Depression. ” (179).

Summary 1929-1932 Process of import substitution in the 1930s constituted the leading engine of growth It changed the role of the industrial sector and increased its share of GDP The process was stimulated by market forces, especially the devaluation of the exchange rate that modified relative prices so that demand shifted from the foreign to the domestic sector Tariffs actually decreased during this time, but the value of exports, or the capacity to import, was able to recover after the crisis partly as a consequence of silver appreciation and party because Mexican exports were diverse Expansive economic policy helped maintain a high level of demand, along with high profit rates and increased productivity through positive linkages from public investment projects

Process of import substitution in the 1930s constituted the leading engine of growth

It changed the role of the industrial sector and increased its share of GDP

The process was stimulated by market forces, especially the devaluation of the exchange rate that modified relative prices so that demand shifted from the foreign to the domestic sector

Tariffs actually decreased during this time, but the value of exports, or the capacity to import, was able to recover after the crisis partly as a consequence of silver appreciation and party because Mexican exports were diverse

Expansive economic policy helped maintain a high level of demand, along with high profit rates and increased productivity through positive linkages from public investment projects

The Second World War and export-led expansion, 1940-45 War brought an expansion of imports from the US as well as capital inflows that increased domestic aggregate demand Monetary expansion: central bank reserves increased by US$22 million while the real money supply grew 20% in 1940- pushing prices up Exports increased more rapidly than imports- because the real exchange rate had been floating and had depreciated 15% Balance of payments accumulated surplus of US$62 million in 39-40 In spite of strong decline in the terms of trade between 39-31, the export expansion created a positive impact on national income but with high inflation

War brought an expansion of imports from the US as well as capital inflows that increased domestic aggregate demand

Monetary expansion: central bank reserves increased by US$22 million while the real money supply grew 20% in 1940- pushing prices up

Exports increased more rapidly than imports- because the real exchange rate had been floating and had depreciated 15%

Balance of payments accumulated surplus of US$62 million in 39-40

In spite of strong decline in the terms of trade between 39-31, the export expansion created a positive impact on national income but with high inflation

GDP: Real GDP increased at an average of 5.2% during the war (1939-45) Industrial sector 7.6% annually War and USA Trade: USA and Mexico did not have trade restrictions during the war except those imposed by military authorities Mexico helped the war effort by providing labor and by keeping its borders open to trade Expansion of US demand for Mexican commodities tended to increase during the war Change in composition of exports: Mineral exports, which historically constituted more than 70% of exports, declined Agricultural products increased slightly Manufacturing sector increased the most: from about 7% in 1939, manufacturing exports increased without interruption until 1945 reaching almost 38% of the total

GDP:

Real GDP increased at an average of 5.2% during the war (1939-45)

Industrial sector 7.6% annually

War and USA Trade:

USA and Mexico did not have trade restrictions during the war except those imposed by military authorities

Mexico helped the war effort by providing labor and by keeping its borders open to trade

Expansion of US demand for Mexican commodities tended to increase during the war

Change in composition of exports:

Mineral exports, which historically constituted more than 70% of exports, declined

Agricultural products increased slightly

Manufacturing sector increased the most: from about 7% in 1939, manufacturing exports increased without interruption until 1945 reaching almost 38% of the total

Growth, Demand, Investment: Growth in the manufacturing sector was based on EXTERNAL DEMAND Domestic inflation was higher than in USA, which gradually overvalued peso- appreciated 32% between 40-45 This inhibited exports by making them less competitive External demand comprised 78.9% of total manufacturing growth during the war, while internal demand comprised of 29.6% Import substitution was reversed, essentially because of the overvaluation of the exchange rate The increasing volume of foreign trade during the war increased the level of real fiscal revenues by 7% early on average, which allowed for an expansion of public expenditures Total real investment during the war grew at an annual rate of 23% As the capital-labor ration increased, output per worker in the industrial sector also increased, also because of the productivity gains obtained by the expansion of economic infrastructure Income distribution worsened during the 1940s

Growth, Demand, Investment:

Growth in the manufacturing sector was based on EXTERNAL DEMAND

Domestic inflation was higher than in USA, which gradually overvalued peso- appreciated 32% between 40-45

This inhibited exports by making them less competitive

External demand comprised 78.9% of total manufacturing growth during the war, while internal demand comprised of 29.6%

Import substitution was reversed, essentially because of the overvaluation of the exchange rate

The increasing volume of foreign trade during the war increased the level of real fiscal revenues by 7% early on average, which allowed for an expansion of public expenditures

Total real investment during the war grew at an annual rate of 23%

As the capital-labor ration increased, output per worker in the industrial sector also increased, also because of the productivity gains obtained by the expansion of economic infrastructure

Income distribution worsened during the 1940s

Summary Industrial expansion during the was caused by the pull of foreign Demand, especially from the USA, and on the supply side by the availability of capital and intermediate goods imports from USA, which allowed more investment and full utilization of capital as well as an increase in investment in infrastructure This was facilitated by the increase in public expenditures financed by the addition fiscal revenues obtained through the expansion of international trade Mexico’s industrial expansion during the war was export driven

Industrial expansion during the was caused by the pull of foreign Demand, especially from the USA, and on the supply side by the availability of capital and intermediate goods imports from USA, which allowed more investment and full utilization of capital as well as an increase in investment in infrastructure

This was facilitated by the increase in public expenditures financed by the addition fiscal revenues obtained through the expansion of international trade

Mexico’s industrial expansion during the war was export driven

Protection-led industrialization, 1946-62 After WWII The end of the war underlined the fact that Mexico fell within the US sphere of influence Monetary stabilization program for US$50 million was accorded between the US Department of the Treasury and the Banco do Mexico in 1941 During the war, an inflow of capital as well as foreign remittances originating from the so-called Bracero Programme generated a large inflow of dollars that impacted the monetary base and the supply of money, contributing to the rise of prices Under a given exchange rate, the peso became increasingly overvalued Exports reduced rate of growth due to the end of the war, imports increased rapidly Imports kept increasing because of the lowered trade barriers In 1946-47, the average GDP valued in US dollars increased 23% each year, while the GDP in real pesos only grew 3.4%

After WWII

The end of the war underlined the fact that Mexico fell within the US sphere of influence

Monetary stabilization program for US$50 million was accorded between the US Department of the Treasury and the Banco do Mexico in 1941

During the war, an inflow of capital as well as foreign remittances originating from the so-called Bracero Programme generated a large inflow of dollars that impacted the monetary base and the supply of money, contributing to the rise of prices

Under a given exchange rate, the peso became increasingly overvalued

Exports reduced rate of growth due to the end of the war, imports increased rapidly

Imports kept increasing because of the lowered trade barriers

In 1946-47, the average GDP valued in US dollars increased 23% each year, while the GDP in real pesos only grew 3.4%

Large trade deficit emerged after the war Reached US$578 million in two years Caused a decline in reserves New Government: Miguel Aleman Enormous pressure on the trade account, the Mexican government decreed a set of protective measures to contain the increase in imports Government started instituting policies that followed a protectionist path In 1948, level of reserves had fallen 67% with respective to 195 Financial authorities allowed the peso to float freely in July 1948 and it immediately depreciated 1949 the peso had depreciated almost 80% Relative price of imports increased compared with domestic goods, which redirected demand

Large trade deficit emerged after the war

Reached US$578 million in two years

Caused a decline in reserves

New Government: Miguel Aleman

Enormous pressure on the trade account, the Mexican government decreed a set of protective measures to contain the increase in imports

Government started instituting policies that followed a protectionist path

In 1948, level of reserves had fallen 67% with respective to 195

Financial authorities allowed the peso to float freely in July 1948 and it immediately depreciated

1949 the peso had depreciated almost 80%

Relative price of imports increased compared with domestic goods, which redirected demand

Protectionism in the 1950s Through the 1950s, the policy to protect domestic industry continued The main idea was to stimulate domestic producers by isolating the national market and at the same time to substitute imports Phenomenon of Mexican ISI during this time: An extensive flow of foreign transnational corporations appeared Corporations that used to export to Mexico under free trade in the 1930s and 40s moved in and established a plant in the country when they discovered that by transferring to Mexico, thy would receive full trade protection and a captive market Trend lasted until the Mexicanization laws in 60s The entry of foreign companies naturally increased private as well as domestic investment Real total investment grew average rate of 17%, while GDP grew at rate of 6.6% Productivity increased Estimated during the 50s and early 60s, about 40% of private investment was composed of imported equipment Developmental institutions minority share holder- if the business was a success then it reduced its participation to a symbolic amount. If so that if it went bankrupt, the other shareholders requested that the government guy up the companies shares

Protectionism in the 1950s

Through the 1950s, the policy to protect domestic industry continued

The main idea was to stimulate domestic producers by isolating the national market and at the same time to substitute imports

Phenomenon of Mexican ISI during this time:

An extensive flow of foreign transnational corporations appeared

Corporations that used to export to Mexico under free trade in the 1930s and 40s moved in and established a plant in the country when they discovered that by transferring to Mexico, thy would receive full trade protection and a captive market

Trend lasted until the Mexicanization laws in 60s

The entry of foreign companies naturally increased private as well as domestic investment

Real total investment grew average rate of 17%, while GDP grew at rate of 6.6%

Productivity increased

Estimated during the 50s and early 60s, about 40% of private investment was composed of imported equipment

Developmental institutions minority share holder- if the business was a success then it reduced its participation to a symbolic amount. If so that if it went bankrupt, the other shareholders requested that the government guy up the companies shares

Further Protection-Led Industrialization 1963-81 Mexico Experienced Important Increases Including: Real GDP increased 7.1% on average Output per capita increased 3.6% Despite the fall of basic sectors, such as agriculture which lost 25% of its share in GDP, and mining, the mining sector grew rapidly: Manufacturing grew 9.3% Power infrastructure grew 14.2% Construction grew 8.3% Government services grew 8.5% Inflation resembled that of DEVELOPED COUNTRIES, which was less than 3% on annual average. This was the case because the key prices of public sector goods were kept fixed for long periods of time. Key Sector Goods: Gasoline Diesel Electricity for Industry Supply of Capital Services—the flow of new net investment Increased 9% from 1963 to 1971, so… Productivity grew by 5%, which in turn… Increased wages 4% in real terms

Mexico Experienced Important Increases Including:

Real GDP increased 7.1% on average

Output per capita increased 3.6%

Despite the fall of basic sectors, such as agriculture which lost 25% of its share in GDP, and mining, the mining sector grew rapidly:

Manufacturing grew 9.3%

Power infrastructure grew 14.2%

Construction grew 8.3%

Government services grew 8.5%

Inflation resembled that of DEVELOPED COUNTRIES, which was less than 3% on annual average. This was the case because the key prices of public sector goods were kept fixed for long periods of time.

Key Sector Goods:

Gasoline

Diesel

Electricity for Industry

Supply of Capital Services—the flow of new net investment

Increased 9% from 1963 to 1971, so…

Productivity grew by 5%, which in turn…

Increased wages 4% in real terms

Mexicanizing the Economy The government took measures because of the additional pressure by the companies for additional protection. They limited new investment such as: Maximum of 49% foreign control of shares and thus need to invest along with Mexican businessmen Entry barriers to foreign firms in certain industries already producing in Mexico Preference for foreign financing rather than foreign investment However the private sector was receiving another level of protection. So flows of foreign investment declined in the 1960s, representing only 5% of total capital accumulation and 7.5% of private investment.

The government took measures because of the additional pressure by the companies for additional protection. They limited new investment such as:

Maximum of 49% foreign control of shares and thus need to invest along with Mexican businessmen

Entry barriers to foreign firms in certain industries already producing in Mexico

Preference for foreign financing rather than foreign investment

However the private sector was receiving another level of protection. So flows of foreign investment declined in the 1960s, representing only 5% of total capital accumulation and 7.5% of private investment.

Weaknesses in development strategy: First sign- Loss of Competitiveness of the Industrial Sector. Consumer Goods almost self-sufficient because there were no imports except for inputs of certain raw materials and capital goods. Ex. Shoes- 4% import coefficient, Soap- 0.1% import coefficient, and Rubber-1% import coefficient Second sign- to protect consumer goods meant implications Protection from foreign competition through non-tarriff barriers with subsidized products in agriculture, energy, and transportation, led to a situation that was quite protected and not internationally competitive. So… Growth could only come from the domestic market which eventually would be limited, do to: Low wages Skewed Income Distribution

First sign- Loss of Competitiveness of the Industrial Sector.

Consumer Goods almost self-sufficient because there were no imports except for inputs of certain raw materials and capital goods.

Ex. Shoes- 4% import coefficient, Soap- 0.1% import coefficient, and Rubber-1% import coefficient

Second sign- to protect consumer goods meant implications

Protection from foreign competition through non-tarriff barriers with subsidized products in agriculture, energy, and transportation, led to a situation that was quite protected and not internationally competitive. So…

Growth could only come from the domestic market which eventually would be limited, do to:

Low wages

Skewed Income Distribution

Weaknesses in the Development Strategy (cont’d.) 3. Third sign- Expanding the protectionist Strategy to other industries was more difficult because the industries were more oligopolistic (dominated by a small number of sellers) and they needed a larger market to compete. The new industries would have to be export-oriented because the domestic market was fully saturated. Thus causing the cost to be much higher. 4. Fourth sign- Increasing the strategy caused the import of manufactured goods to grow rapidly and the trade deficit to widen. 1960 the deficit was US$457 million. 1970 the deficit was US$1038 million 5. Fifth sign- the increasing reliance on external borrowing. By 1970, the public sector ran a deficit of 3.8%, while the economy needed 1.3% of GDP of net external borrowing. The problem: By following the same development strategy, Mexico did not make it clear where the resources would come from to finance the growth of the economy in the long term.

3. Third sign- Expanding the protectionist Strategy to other industries was more difficult because the industries were more oligopolistic (dominated by a small number of sellers) and they needed a larger market to compete.

The new industries would have to be export-oriented because the domestic market was fully saturated. Thus causing the cost to be much higher.

4. Fourth sign- Increasing the strategy caused the import of manufactured goods to grow rapidly and the trade deficit to widen.

1960 the deficit was US$457 million. 1970 the deficit was US$1038 million

5. Fifth sign- the increasing reliance on external borrowing.

By 1970, the public sector ran a deficit of 3.8%, while the economy needed 1.3% of GDP of net external borrowing.

The problem: By following the same development strategy, Mexico did not make it clear where the resources would come from to finance the growth of the economy in the long term.

Why didn’t the model collapse immediately? Because of external financing and the oil boom in the late 1970s, Mexico was able to keep afloat. It was clear liberalization was needed for the economy, but no one wanted to implement this because: It would imply more competition and loss of economic advantage and high profit rates Lose discretionary power to drive the economy, thus losing political control over the private sector.

Because of external financing and the oil boom in the late 1970s, Mexico was able to keep afloat.

It was clear liberalization was needed for the economy, but no one wanted to implement this because:

It would imply more competition and loss of economic advantage and high profit rates

Lose discretionary power to drive the economy, thus losing political control over the private sector.

Desarrollo Compartido (Sharing Development) The government’s response to the economy meant more public spending in subsidies, more state enterprises and infrastructure largely financed by public indebtedness. The government goals were to stimulate economic growth while improving income distribution, but aborted this in December 1972 because of the opposition from the private sector. The strategy worked in terms of growth, since real GDP increased 6.7% during 1971-1981. However, in August 1976, the peso was still devalued, but the oil boom made the lack of foreign exchange vanish. It went from 6.3 billion barrels in November 1976 to 16 billion in 1977 to 40 billion the next year.

The government’s response to the economy meant more public spending in subsidies, more state enterprises and infrastructure largely financed by public indebtedness.

The government goals were to stimulate economic growth while improving income distribution, but aborted this in December 1972 because of the opposition from the private sector.

The strategy worked in terms of growth, since real GDP increased 6.7% during 1971-1981. However, in August 1976, the peso was still devalued, but the oil boom made the lack of foreign exchange vanish. It went from 6.3 billion barrels in November 1976 to 16 billion in 1977 to 40 billion the next year.

Industry, Intermediate Goods, Capital Goods (Increases and Decreases) After the oil boom, the government had some objectives. Use the surplus of oil to finance a ‘National Fund for Employment’ with jobs as a medium to reduce inequality and poverty National Plan for Industrial Development (1979) with the objective for the Mexican economy to reach an average GDP real growth rate of 10% from 1980 to 1990. Industry experienced an accelerated path during the 1970s with a growth of 11% in real terms. This accelerated Industrialization and extended to more sectors. The industrial sector led to a wider set of goods, including equipment, machinery, and raw materials. The production of consumer goods fell at the expense of intermediate and capital goods. 1960 consumer goods were 58% of manufacturing production 1970 consumer goods fell to 50% 1981 consumer goods fell to 42$ HOWEVER… Intermediate goods increased 1960 intermediate goods were 28% 1970 intermediate goods increased to 32% 1981 intermediate goods increased to 36% Capital goods increased as well. The level of protection extended to all sorts of goods.

After the oil boom, the government had some objectives.

Use the surplus of oil to finance a ‘National Fund for Employment’ with jobs as a medium to reduce inequality and poverty

National Plan for Industrial Development (1979) with the objective for the Mexican economy to reach an average GDP real growth rate of 10% from 1980 to 1990.

Industry experienced an accelerated path during the 1970s with a growth of 11% in real terms. This accelerated Industrialization and extended to more sectors. The industrial sector led to a wider set of goods, including equipment, machinery, and raw materials. The production of consumer goods fell at the expense of intermediate and capital goods.

1960 consumer goods were 58% of manufacturing production

1970 consumer goods fell to 50%

1981 consumer goods fell to 42$

HOWEVER… Intermediate goods increased

1960 intermediate goods were 28%

1970 intermediate goods increased to 32%

1981 intermediate goods increased to 36%

Capital goods increased as well. The level of protection extended to all sorts of goods.

1982 Debt crisis recovery macroeconomic policies of the 1970s left Mexico's economy highly vulnerable to external conditions. caused the worst recession since the 1930s By mid-1981  falling oil prices, rising inflation, chronically overvalued peso, and deteriorating balance of payments that led to massive capital flight By defending the overvalued peso, led to the disappearance of Mexico’s foreign reserves and forced the government to devalue the peso three times during 1982

macroeconomic policies of the 1970s left Mexico's economy highly vulnerable to external conditions.

caused the worst recession since the 1930s

By mid-1981  falling oil prices, rising inflation, chronically overvalued peso, and deteriorating balance of payments that led to massive capital flight

By defending the overvalued peso, led to the disappearance of Mexico’s foreign reserves and forced the government to devalue the peso three times during 1982

1982 Peso devaluation The devaluation: fueled inflation and prevented short-term recovery depressed real wages increased private sector’s burden in servicing its dollar-denominated debt cut off from international credit, the government declared an involuntary suspension on debt payments in Aug 1982 and the nationalization of Mexico’s private banking system

The devaluation:

fueled inflation and prevented short-term recovery

depressed real wages

increased private sector’s burden in servicing its dollar-denominated debt

cut off from international credit, the government declared an involuntary suspension on debt payments in Aug 1982 and the nationalization of Mexico’s private banking system

Immediate reaction to the crisis By late 1982 incoming President Miguel de la Madrid: reduced public spending drastically stimulated exports fostered economic growth to balance the national accounts BUT … recovery was extremely slow to materialize which led to stagnation of economy throughout the 1980s as a result of continuing negative terms of trade high domestic interest rates scare credit

By late 1982 incoming President Miguel de la Madrid:

reduced public spending drastically

stimulated exports

fostered economic growth to balance the national accounts

BUT …

recovery was extremely slow to materialize

which led to stagnation of economy throughout the 1980s as a result of

continuing negative terms of trade

high domestic interest rates

scare credit

Failure to attract investment Widespread fears that the government might fail to achieve fiscal balance and have to expand the money supply and raise taxes led to capital flight and lack of foreign investment Capital flight increased inflationary pressures Resulting reduction in domestic savings impeded growth Slow growth also a result of government’s reduction in public investment and raising of real domestic interest rates to deter capital flight

Widespread fears that the government might fail to achieve fiscal balance and have to expand the money supply and raise taxes led to capital flight and lack of foreign investment

Capital flight increased inflationary pressures

Resulting reduction in domestic savings impeded growth

Slow growth also a result of government’s reduction in public investment and raising of real domestic interest rates to deter capital flight

Mexican Economy in the 1980s GDP grew at an avg rate of 0.1% per year between 1983-88 Average inflation of 100% Public consumption grew at avg annual rate of <2% Private consumption did not grow Total investment fell at avg annual rate of 4% Public investment fell at rate of 11% De la Madrid’s stabilization strategy imposed high social costs: real disposable income per capita fell 5% each year between 1983-88 high levels of unemployment and underemployment, especially in rural areas stimulated migration to Mexico City and the United States

GDP grew at an avg rate of 0.1% per year between 1983-88

Average inflation of 100%

Public consumption grew at avg annual rate of <2%

Private consumption did not grow

Total investment fell at avg annual rate of 4%

Public investment fell at rate of 11%

De la Madrid’s stabilization strategy imposed high social costs:

real disposable income per capita fell 5% each year between 1983-88

high levels of unemployment and underemployment, especially in rural areas

stimulated migration to Mexico City and the United States

Path to Recovery By 1988, inflation was finally under control fiscal and monetary discipline attaine relative price adjustment achieved structural reform in trade and public-sector management underway economy was bound for recover BUT, these developments were still inadequate ot attract foreign investment and return capital in sufficient quantities for sustained recovery Led to shift in development strategy  need to generate net capital inflow

By 1988, inflation was finally under control

fiscal and monetary discipline attaine

relative price adjustment achieved

structural reform in trade and public-sector management underway

economy was bound for recover

BUT, these developments were still inadequate ot attract foreign investment and return capital in sufficient quantities for sustained recovery

Led to shift in development strategy  need to generate net capital inflow

1989 Reforms April 1989, President Carlso Salinas de Gortari announced new development plan for 1989-94 Called for annual GDP growth of 6% and stable inflation By boosting investment share of GDP Encouraging private investment through denationalization of state enterprises and deregulation of economy Prioritised reducing external debt Lowered domestic borrowing costs, reprivatising the banking system Began discussing the idea of a free-trade agreement with US Led to increased levels of capital repatriation and foreign investment

April 1989, President Carlso Salinas de Gortari announced new development plan for 1989-94

Called for annual GDP growth of 6% and stable inflation

By boosting investment share of GDP

Encouraging private investment through denationalization of state enterprises and deregulation of economy

Prioritised reducing external debt

Lowered domestic borrowing costs, reprivatising the banking system

Began discussing the idea of a free-trade agreement with US

Led to increased levels of capital repatriation and foreign investment

The Economic Solidarity Pact a.k.a. “the Pact” In December 1987 the government announced the Economic Solidarity Pacts also known as “the Pact”. It promised to reduce monthly inflation to about 2 % by the end of the following year.

Implementation of the Economic Solidarity “Pact” The Pact was jointly signed by the government and formal representatives of labor, agriculture producers and the business sector. The Pact basic components were; further cuts in the fiscal deficit, tighter monetary policy, trade liberalization and for the first time since the crisis erupted in 1982, a comprehensive incomes policy. The minimum wage, exchange rate and public prices were to be adjusted upward and fixed for a month and then would be increased each month with the expected level of inflation. However those measurement weren’t followed and amounted to a de facto freeze on prices and wages. The government agreed to keep the exchange rate and public prices frozen and raised the minimum wage by only 3 %. During 1988 the Pact as renewed four times.

The Pact was jointly signed by the government and formal representatives of labor, agriculture producers and the business sector.

The Pact basic components were; further cuts in the fiscal deficit, tighter monetary policy, trade liberalization and for the first time since the crisis erupted in 1982, a comprehensive incomes policy.

The minimum wage, exchange rate and public prices were to be adjusted upward and fixed for a month and then would be increased each month with the expected level of inflation.

However those measurement weren’t followed and amounted to a de facto freeze on prices and wages. The government agreed to keep the exchange rate and public prices frozen and raised the minimum wage by only 3 %.

During 1988 the Pact as renewed four times.

The “Pact” The Pact had three elements. First there was a demand management component, that is, the fiscal surplus was increased and the supply of credit contracted. Second, the government implemented incomes policies to slow down inflation and stabilize expectation. Lastly there was a program of structural reform that promotes and accelerates trade liberalization and the divestiture of public enterprise.

The Pact had three elements. First there was a demand management component, that is, the fiscal surplus was increased and the supply of credit contracted.

Second, the government implemented incomes policies to slow down inflation and stabilize expectation.

Lastly there was a program of structural reform that promotes and accelerates trade liberalization and the divestiture of public enterprise.

Why did the “Pact” work and why had a similar program not been tried earlier In the past Mexican authorities were reluctant to use any sort of generalized price and wage control mechanism. Some opposed it because they were not convinced of its theoretical soundness. Other policymakers were doubtful of using price controls for more pragmatic reasons. Memories of the failed Plan Austral in Argentina and Plan Cruzado in Brazil which used incomes policy as their centerpiece were too fresh. Incomes policy implied an investment in government credibility at times when confidence in the government were low.

In the past Mexican authorities were reluctant to use any sort of generalized price and wage control mechanism.

Some opposed it because they were not convinced of its theoretical soundness. Other policymakers were doubtful of using price controls for more pragmatic reasons.

Memories of the failed Plan Austral in Argentina and Plan Cruzado in Brazil which used incomes policy as their centerpiece were too fresh.

Incomes policy implied an investment in government credibility at times when confidence in the government were low.

How was the “Pact” different? There was however one fundamental difference. The Pact was launched when foreign reserves were high ( est. US $ 13.7 billion). The reserves allowed the government to sustain a fixed nominal exchange rate while imports tariffs were reduced and demand and output could experience a slight expansion. A year later, foreign reserves were estimates at about $6 billion. That was the “cost” of the policy package, about $10 billion. In a way, foreign reserves in Mexico played the role that the US financial support had played in the Israeli stabilization program. Because Mexico had no access to further sources of finance, it had to use its own savings.

There was however one fundamental difference. The Pact was launched when foreign reserves were high ( est. US $ 13.7 billion). The reserves allowed the government to sustain a fixed nominal exchange rate while imports tariffs were reduced and demand and output could experience a slight expansion.

A year later, foreign reserves were estimates at about $6 billion. That was the “cost” of the policy package, about $10 billion. In a way, foreign reserves in Mexico played the role that the US financial support had played in the Israeli stabilization program. Because Mexico had no access to further sources of finance, it had to use its own savings.

The Success of the “Pact” It relied on the prevailing initial condition as well as on the characteristic of its implementation. Three condition were practically crucial; the fiscal deficit under control, strong external accounts, and the fact that relatives prices were allowed to realign before the wage and price freeze was launched. As for implementation, several features are worth mentioning. The Pact included large dose of strict, orthodox measure such as fiscal deficit cuts and credit tightening The form in which the program was implemented differed greatly from its analogs in Argentina and Brazil; decision were concerted rather than forced by decree. Wary of the bad reputation of the price and wages freezes, the government never used the words “freeze” or heterodox” in jargon.

It relied on the prevailing initial condition as well as on the characteristic of its implementation.

Three condition were practically crucial; the fiscal deficit under control, strong external accounts, and the fact that relatives prices were allowed to realign before the wage and price freeze was launched.

As for implementation, several features are worth mentioning.

The Pact included large dose of strict, orthodox measure such as fiscal deficit cuts and credit tightening

The form in which the program was implemented differed greatly from its analogs in Argentina and Brazil; decision were concerted rather than forced by decree. Wary of the bad reputation of the price and wages freezes, the government never used the words “freeze” or heterodox” in jargon.

Why did the “Pact” work The Banco de Mexico held record levels of foreign reserves which made fixing the exchange rate a more credible policy. The required additional fiscal adjustment was feasible because most of the work had already been done. The peso was undervalued so that the inevitable exchange rate appreciation following a freeze could be less damaging and less complicated to manage. Also the fact that a comprehensive income policy had not been tried in the past, before the fiscal adjustment was in place, would make the measure more credible.

The Banco de Mexico held record levels of foreign reserves which made fixing the exchange rate a more credible policy.

The required additional fiscal adjustment was feasible because most of the work had already been done.

The peso was undervalued so that the inevitable exchange rate appreciation following a freeze could be less damaging and less complicated to manage.

Also the fact that a comprehensive income policy had not been tried in the past, before the fiscal adjustment was in place, would make the measure more credible.

Results of the “Pact” The Pact produced immediate good results. During the second semester the average inflation was 1.2 % a month, far lower than the 9 % in 1987. In 1988 Mexico’s GDP grew 1.3 %, nonoil exports at 15.2 % and private investment at 10.9 %. The Pact was a lot more successful than the more orthodox stabilization program of 1983. The reduction of inflation was much larger, growth was positive, and real wages fell by considerably less than 1983.

The Pact produced immediate good results. During the second semester the average inflation was 1.2 % a month, far lower than the 9 % in 1987.

In 1988 Mexico’s GDP grew 1.3 %, nonoil exports at 15.2 % and private investment at 10.9 %.

The Pact was a lot more successful than the more orthodox stabilization program of 1983.

The reduction of inflation was much larger, growth was positive, and real wages fell by considerably less than 1983.

The aftermath of the “Pact” The Pact brought inflation under control, but economic recovery remained elusive. It was evident that fiscal discipline and structural reform was necessary condition for growth yet it was not enough. The Mexican government could not lead recovery with expansionary policies because that would increase inflation and erode hard-won private sector confidence. Likewise, the private sector was not going to lead the recovery because it feared a failure or reversal of the policies. The challenge faced by Salinas administration in 1988 was to end this impasse.

The Pact brought inflation under control, but economic recovery remained elusive.

It was evident that fiscal discipline and structural reform was necessary condition for growth yet it was not enough.

The Mexican government could not lead recovery with expansionary policies because that would increase inflation and erode hard-won private sector confidence.

Likewise, the private sector was not going to lead the recovery because it feared a failure or reversal of the policies.

The challenge faced by Salinas administration in 1988 was to end this impasse.

The Mexican Peso Crash Causes, Consequences, and Comeback

Alternative Explanations There have been a few explanations used to allow for the peso crash: Bad Luck and mistakes International Pressures Political Challenges to the hegemony of the PRI.

There have been a few explanations used to allow for the peso crash:

Bad Luck and mistakes

International Pressures

Political Challenges to the hegemony of the PRI.

Bad luck and mistakes First, this is the argument that Salinas’ actions were fine; that the exchange rate was right and was derailed only by the unforeseeable events of political violence and the U.S. Federal Reserve interest rate hike. Also, this is the argument of Zedillo’s team’s incompetence, based partially on Jaime Serre, Zedillo’s trade minister, who was criticized for making “clumsy announcements” of policy intentions and inconsistent information which unnecessarily frightened investors.

First, this is the argument that Salinas’ actions were fine; that the exchange rate was right and was derailed only by the unforeseeable events of political violence and the U.S. Federal Reserve interest rate hike.

Also, this is the argument of Zedillo’s team’s incompetence, based partially on Jaime Serre, Zedillo’s trade minister, who was criticized for making “clumsy announcements” of policy intentions and inconsistent information which unnecessarily frightened investors.

These two arguments have only some merit. Yes, 1994 was unpredictable with international action; however, the problem lay in the fact that Mexico was allowed to become so vulnerable to foreign investment behavior.

These two arguments have only some merit. Yes, 1994 was unpredictable with international action; however, the problem lay in the fact that Mexico was allowed to become so vulnerable to foreign investment behavior.

International Pressures These arguments more compelling; more validity. Salinas wouldn’t correct the exchange rate due to foreign pressure to maintain the status quo. However, this pressure presupposes an already dangerously overvalued exchange rate..

These arguments more compelling; more validity.

Salinas wouldn’t correct the exchange rate due to foreign pressure to maintain the status quo.

However, this pressure presupposes an already dangerously overvalued exchange rate..

Mexico placed great importance on being accepted into NAFTA (the North American Free Trade Agreement). A strong peso helped gain support of the U.S. congress. Capital Markets – “Hot Money” – many developing countries find themselves unable to make decisions that might lesson the confidence of foreign investors. This pressure wasn’t too subtle, in Mexico’s case. Restructuring of public debt from peso-denominated treasury bills to dollar-denominated ones (cetes  tesobonos)

Mexico placed great importance on being accepted into NAFTA (the North American Free Trade Agreement). A strong peso helped gain support of the U.S. congress.

Capital Markets – “Hot Money” – many developing countries find themselves unable to make decisions that might lesson the confidence of foreign investors.

This pressure wasn’t too subtle, in Mexico’s case.

Restructuring of public debt from peso-denominated treasury bills to dollar-denominated ones (cetes  tesobonos)

Political Challenges to the Hegemony of the PRI Really, the root of Mexico’s adherence to the exchange rate was domestic politics. The 1988 election was the most contested in Mexican history – the PRI was challenged for the first time ever. Salinas victory was accused of fraud Devaluation had hurt the PRI’s legitimacy and credibility – the last three presidents had all ended their sexenio s with devaluations.

Really, the root of Mexico’s adherence to the exchange rate was domestic politics.

The 1988 election was the most contested in Mexican history – the PRI was challenged for the first time ever.

Salinas victory was accused of fraud

Devaluation had hurt the PRI’s legitimacy and credibility – the last three presidents had all ended their sexenio s with devaluations.

Those who benefited from a strong peso: Large corporations: had large amounts of foreign-denominated debt. Any devaluation would directly increase their debt burdens. Owners of newly privatized banks: were borrowing USD abroad and borrowing pesos at home for a huge profit. …obviously, didn’t want that to end.

Large corporations:

had large amounts of foreign-denominated debt. Any devaluation would directly increase their debt burdens.

Owners of newly privatized banks:

were borrowing USD abroad and borrowing pesos at home for a huge profit. …obviously, didn’t want that to end.

Organized labor: Because high inflation eroded workers’ real wages, they made deals ( pactos ) with the government that stated that they would make wage demands and businesses would contain price hikes if the government fulfilled promises concerning spending, taxes, and deficits. The middle class: They had a higher purchasing power from a stronger peso. = It was an unwise politician who would deem the peso overvalued, as it actually was.

Organized labor:

Because high inflation eroded workers’ real wages, they made deals ( pactos ) with the government that stated that they would make wage demands and businesses would contain price hikes if the government fulfilled promises concerning spending, taxes, and deficits.

The middle class:

They had a higher purchasing power from a stronger peso.

= It was an unwise politician who would deem the peso overvalued, as it actually was.

Consequences of the Collapse Devastated economic welfare and financial stability. There was a fundamental change in the political system, and an end to the PRI’s strong leadership. Deepest economic recession ever in Mexico. Unemployment soared. Rise in the informal economy, downward pressure on wages. In formal economy, inflation and devaluation of real wages. Consumption down by half. Spread of violence. Collapse of the Financial system. Peso overwhelmingly rejected in global market.

Devastated economic welfare and financial stability.

There was a fundamental change in the political system, and an end to the PRI’s strong leadership.

Deepest economic recession ever in Mexico.

Unemployment soared.

Rise in the informal economy, downward pressure on wages. In formal economy, inflation and devaluation of real wages.

Consumption down by half.

Spread of violence.

Collapse of the Financial system.

Peso overwhelmingly rejected in global market.

Collapse of the Financial System Most visible consequence. The banking system had been inefficient before – the price of borrowing was extremely high. After the crisis, banks helped themselves fail by spiking interest rates (from 18% to 120%) and calling in loans which devastated small and medium business, causing bankruptcy. The consumer credit sector sunk into a massive default which paralyzed the financial system.

Most visible consequence.

The banking system had been inefficient before – the price of borrowing was extremely high.

After the crisis, banks helped themselves fail by spiking interest rates (from 18% to 120%) and calling in loans which devastated small and medium business, causing bankruptcy.

The consumer credit sector sunk into a massive default which paralyzed the financial system.

The people began to organize themselves to express grievances and make demands: El Barzón. The govt. tried to respond with debt relief schemes that would restructure consumer and commercial debt by automatically adjusting and capping the real interest rate, but these failed, because of poorly executed information briefings, public confusion, etc. 1995: govt. imposed tougher capitalization requirements; banks couldn’t handle them, and basically banks were just about re-nationalized. Bailout system: assimilation of nonperforming loans. By 1998, had accumulated about $65 billion in liabilities.

The people began to organize themselves to express grievances and make demands: El Barzón.

The govt. tried to respond with debt relief schemes that would restructure consumer and commercial debt by automatically adjusting and capping the real interest rate, but these failed, because of poorly executed information briefings, public confusion, etc.

1995: govt. imposed tougher capitalization requirements; banks couldn’t handle them, and basically banks were just about re-nationalized.

Bailout system: assimilation of nonperforming loans. By 1998, had accumulated about $65 billion in liabilities.

Political fallout of the Bank Rescue Fobaproa was applied to protect the banks from going bankrupt. Its portfolio reached $65 billion which accounted for15% of Mexico's GDP. This is the largest increase of Mexican internal debt in its history. Debt increased from 28% to 42% The current government wanted to incorporate Fobaproa liabilities into the public sector debt. Other parties now decided to oppose the new PRI policy, making this issue the center of the struggle for political power. President Zedillo fails in his effort to persuade the growing the opposition to support the bailout .

Fobaproa was applied to protect the banks from going bankrupt. Its portfolio reached $65 billion which accounted for15% of Mexico's GDP.

This is the largest increase of Mexican internal debt in its history. Debt increased from 28% to 42%

The current government wanted to incorporate Fobaproa liabilities into the public sector debt.

Other parties now decided to oppose the new PRI policy, making this issue the center of the struggle for political power.

President Zedillo fails in his effort to persuade the growing the opposition to support the bailout .

Opposition parties become temporary united, giving three reasons why they do not support the bailout: PAN and PRD maintained that the recapitalization of the banks violated the constitution. Fobaproa was accused of bankrupting the country because of its incompetency in dealing with the funds; The fund was a moral hazard among businesses that unloaded their debt onto taxpayers. 3) The most immediate effect of the deposit protection plan was the most beneficial to the Mexican wealthy elite. Congress became &quot;a tool of investigation“ for the first time. Claims that the loans favored the wealthy overwhelmingly, probably were exaggerated, but proved political effective.

Opposition parties become temporary united, giving three reasons why they do not support the bailout:

PAN and PRD maintained that the recapitalization of the banks violated the constitution.

Fobaproa was accused of bankrupting the country because of its incompetency in dealing with the funds; The fund was a moral hazard among businesses that unloaded their debt onto taxpayers.

3) The most immediate effect of the deposit protection plan was the most beneficial to the Mexican wealthy elite.

Congress became &quot;a tool of investigation“ for the first time.

Claims that the loans favored the wealthy overwhelmingly, probably were exaggerated, but proved political effective.

The Bailout Deal and the Advent of Mexican Party Politics After the collapse there were fundamental party changes and a trend towards more authentic multiparty competition. PRI went away from being based in ideology and claimed instead to be a pragmatic party ready to face the threat of financial collapse with substantial policy proposals.

After the collapse there were fundamental party changes and a trend towards more authentic multiparty competition.

PRI went away from being based in ideology and claimed instead to be a pragmatic party ready to face the threat of financial collapse with substantial policy proposals.

PAN worked with PRI to create an alternative financial reform package. Denied coverage of loans over 5 million pesos. And included smaller credit card and mortgage obligations in Fobaproa. Provided aid for smaller debtors. Eliminated Fobaproa and replaced it with the Bank Deposit Insurance Institute (IPAB) – legally, then, not public debt. Prohibited public officials from the ’95 bailout to serve IPAB December 12, 1998 – the plan was approved with a landslide, although PRD and El Barzón remained opposed.

PAN worked with PRI to create an alternative financial reform package.

Denied coverage of loans over 5 million pesos. And included smaller credit card and mortgage obligations in Fobaproa.

Provided aid for smaller debtors.

Eliminated Fobaproa and replaced it with the Bank Deposit Insurance Institute (IPAB) – legally, then, not public debt.

Prohibited public officials from the ’95 bailout to serve IPAB

December 12, 1998 – the plan was approved with a landslide, although PRD and El Barzón remained opposed.

In July of 1999 a $20 million audit conducted by Canadian Michael Mackey concluded that: The crisis resulted from significant shortcomings in the bank re-privatization process, inadequate experience of the new owners, and poor government regulation Pumping $ into insolvent banks had cost Mexican taxpayers far more than letting them fail would have. $8 billion : questionable legality $638 million : clearly illegal $4.4 billion : directly to affiliated companies

In July of 1999 a $20 million audit conducted by Canadian Michael Mackey concluded that:

The crisis resulted from significant shortcomings in the bank re-privatization process, inadequate experience of the new owners, and poor government regulation

Pumping $ into insolvent banks had cost Mexican taxpayers far more than letting them fail would have.

$8 billion : questionable legality

$638 million : clearly illegal

$4.4 billion : directly to affiliated companies

Evaluating the Crisis; How effective was reform? What did the Mexican debate over devaluation and its effects tell us about economic policy reform? Economic policy reform is highly polarized.

What did the Mexican debate over devaluation and its effects tell us about economic policy reform?

Economic policy reform is highly polarized.

Critics of economic liberalization: Free markets lead developing nations to crisis, not growth. It was argued that if any country were to succeed by economic liberalization under the rules of the Washington Consensus, it would have been Mexico. Mexico's government was genuinely committed to reform & finiancial authorities were among the world's most technically capable. Fiscal discipline was destroyed by the incongruent and unsustainable policies implemented by the government. 90 million Mexicans stuggled the effects of a devasting recession The average Mexican received very little benefit from the improved macroeconomic performance. Devalued currency made the Mexican goods extremely competitive, but the economy failed to generate substantial amount of growth or jobs.

Critics of economic liberalization:

Free markets lead developing nations to crisis, not growth.

It was argued that if any country were to succeed by economic liberalization under the rules of the Washington Consensus, it would have been Mexico. Mexico's government was genuinely committed to reform & finiancial authorities were among the world's most technically capable.

Fiscal discipline was destroyed by the incongruent and unsustainable policies implemented by the government.

90 million Mexicans stuggled the effects of a devasting recession

The average Mexican received very little benefit from the improved macroeconomic performance.

Devalued currency made the Mexican goods extremely competitive, but the economy failed to generate substantial amount of growth or jobs.

Mexico suffered deeply from the devaluation, however it is not the blame of economic liberalization in general. Specific policy errors should not be confused with general economic reform. &quot;The financial collapse was not the result of trade and investment liberalization or fiscal streamlining. Rather, the rapid and unregulated opening of capital markets and the banking sector, combined with an unsustainable exchange rate policy, were the main factors behind the crisis.“ -Structural reform and openness enabled the Mexican economy to recover from policy mistakes and exogenous shocks more rapidly than it would have under other policies favored under ISI. -In contrast to the aftermath of the 1982 Oil Crisis that lead to the decade of inflation and stagnation; the next three years following the devaluation saw the return of fiscal discipline and an open business climate that welcomed foreign investment, helping Mexico reverse the 6.2% decline in GDP.

Mexico suffered deeply from the devaluation, however it is not the blame of economic liberalization in general.

Specific policy errors should not be confused with general economic reform.

&quot;The financial collapse was not the result of trade and investment liberalization or fiscal streamlining. Rather, the rapid and unregulated opening of capital markets and the banking sector, combined with an unsustainable exchange rate policy, were the main factors behind the crisis.“

-Structural reform and openness enabled the Mexican economy to recover from policy mistakes and exogenous shocks more rapidly than it would have under other policies favored under ISI.

-In contrast to the aftermath of the 1982 Oil Crisis that lead to the decade of inflation and stagnation; the next three years following the devaluation saw the return of fiscal discipline and an open business climate that welcomed foreign investment, helping Mexico reverse the 6.2% decline in GDP.

This was helped by the expansion of Mexican exports to the United States. However, this time, Mexico proved to be not simply an &quot;assembly platform&quot; for imported imports, but increasing Mexicans are involved in high value added activities of production and distribution for both foreign and domestic markets (ie: research and development, engineering and marketing). Industrial expansion was not only limited to the border region. Mexico showed ability to expand economically, disregardly the effects of exogenous shocks after 1998. This was in the face of reduced public spending and contracted foreign capital inflows. This made the Mexican market stand in stark contrast to other emerging markets facing these same two constraints and environment. The reform in Mexico shielded the U.S. from the economic shocks usually associated with the effects of devaluation in a major trading partner. The U.S. economic expansion actually accelerated.

This was helped by the expansion of Mexican exports to the United States.

However, this time, Mexico proved to be not simply an &quot;assembly platform&quot; for imported imports, but increasing Mexicans are involved in high value added activities of production and distribution for both foreign and domestic markets (ie: research and development, engineering and marketing).

Industrial expansion was not only limited to the border region.

Mexico showed ability to expand economically, disregardly the effects of exogenous shocks after 1998. This was in the face of reduced public spending and contracted foreign capital inflows. This made the Mexican market stand in stark contrast to other emerging markets facing these same two constraints and environment.

The reform in Mexico shielded the U.S. from the economic shocks usually associated with the effects of devaluation in a major trading partner. The U.S. economic expansion actually accelerated.

Due to the NAFTA agreement, Mexico took only 18 months to recover its pre-crisis import levels. Mexico did not steal American jobs by exporting more goods to the U.S., but simply displaced other goods previously exported by other emerging markets. Poverty remains pervasive, and the &quot;dual economy&quot; is very obvious. This problem may stem from the fact that many workers were never even integrated into the domestic economy, let alone the international economy when NAFTA was established; the social inequality is long-standing and not a result of NAFTA. Exports alone won't alleviate the poverty, however the continued integration of Mexico into markets for traditional and sophisticated goods is essential for generating quality jobs which will create greater demand for basic and higher level education. The current environment of macroeconomic discipline and trade opportunities builds the foundation for the possibilities of future growth.

Due to the NAFTA agreement, Mexico took only 18 months to recover its pre-crisis import levels. Mexico did not steal American jobs by exporting more goods to the U.S., but simply displaced other goods previously exported by other emerging markets.

Poverty remains pervasive, and the &quot;dual economy&quot; is very obvious. This problem may stem from the fact that many workers were never even integrated into the domestic economy, let alone the international economy when NAFTA was established; the social inequality is long-standing and not a result of NAFTA.

Exports alone won't alleviate the poverty, however the continued integration of Mexico into markets for traditional and sophisticated goods is essential for generating quality jobs which will create greater demand for basic and higher level education.

The current environment of macroeconomic discipline and trade opportunities builds the foundation for the possibilities of future growth.

Beyond Reform: Mexico’s Development Challenge The achievements in the export sector, though good, are not enough to provide sustained or broad-based economic growth. Lacks a viable banking sector. Only Mexico’s largest corporations have regular access to bank capital. Ranks 9th worst for bank system stability, below Kazakhstan, Romania, and Tunisia.

The achievements in the export sector, though good, are not enough to provide sustained or broad-based economic growth.

Lacks a viable banking sector.

Only Mexico’s largest corporations have regular access to bank capital.

Ranks 9th worst for bank system stability, below Kazakhstan, Romania, and Tunisia.

Private sector acknowledges banks’ limitations. Influential entrepreneurs in 1999, proposed formal dollarization, which was emphatically rejected by Zedillo, who said that the floating exchange rate was best for decreasing volatility. The government is aware of its need to diversify export markets. Even though it sells more than ever now, its unmoving trade gap suggests a structural dependence on imports that could once again jeopardize macroeconomic stability.

Private sector acknowledges banks’ limitations. Influential entrepreneurs in 1999, proposed formal dollarization, which was emphatically rejected by Zedillo, who said that the floating exchange rate was best for decreasing volatility.

The government is aware of its need to diversify export markets.

Even though it sells more than ever now, its unmoving trade gap suggests a structural dependence on imports that could once again jeopardize macroeconomic stability.

Conclusion The Political Legacy of the Crisis Policy continuity and structural reform has deepened. Populism is not dead in Mexico, yet politics will not reverse the fundamental transformations that Mexican trade and investment now experiences. Now the main debates for the role of government concerns corruption, administrative and regulatory competence, and the basic issues of social protection and redistribution. The political process itself was effectively opened by the crisis. Opposition parties were able to exploit opportunities for this political opening. The process of democratization was accelerated, and the nature of political competition and the legislative process were finally shaped. Voters for the first time had real political alternatives, and the devaluation proved as the major catalyst that led to the demise of the world's longest-lasting single-party state. Vicente Fox from the PAN party won the election in 2000, ending the political hegemonic rule of the PRI.

Policy continuity and structural reform has deepened.

Populism is not dead in Mexico, yet politics will not reverse the fundamental transformations that Mexican trade and investment now experiences.

Now the main debates for the role of government concerns corruption, administrative and regulatory competence, and the basic issues of social protection and redistribution.

The political process itself was effectively opened by the crisis. Opposition parties were able to exploit opportunities for this political opening. The process of democratization was accelerated, and the nature of political competition and the legislative process were finally shaped.

Voters for the first time had real political alternatives, and the devaluation proved as the major catalyst that led to the demise of the world's longest-lasting single-party state. Vicente Fox from the PAN party won the election in 2000, ending the political hegemonic rule of the PRI.