Mexico

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Graphs: Growth | Income | Inflation | Unemployment | Well-being | Trade Volume | Trade (CAB) | Debt | Spending

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Money

1934-1940: The state promotes industrialization by encouraging import substitution, mobilizing domestic savings, and directing state credit toward priority investment projects. Its policies on interest and exchange rates are conservative so as to attract external capital to support industrialization.

1941-1951: The National Finance Bank (Nafinsa), originally created as an investment bank, is reorganized to foster industrial expansion. To reduce the costs of imported capital goods and to expand productive capacity, the government undervalues the peso.

1952-1969: The country's currency remains stable during these years of the "Mexican miracle." Fiscal and monetary policies are prudent, and inflation is low, at least by Latin American standards. But the increasing availability of international capital enables expansionary policies that create large fiscal deficits. The peso progressively becomes overvalued, laying the foundation for a financial crisis.

1970-1975: Mexico finances internal deficits with massive external borrowing. The government is determined to maintain a fixed exchange rate despite rising inflation. By the late '70s, falling oil prices combine with rising international interest rates to throw Mexico's external payments far out of balance.

1976-1981: By 1976, Mexico is in financial crisis. The government curbs public-sector spending, restricts credit, and allows the peso to float, ending 20 years of exchange-rate stability. The discovery of petroleum deposits in 1977 briefly alleviates fiscal pressures and induces a false sense of security. Officials relax their policies of fiscal restraint and postpone adjustment measures.

1982-1987: Mexico can no longer service its external debt, precipitating an international economic crisis. Finance Minister Silva Herzog solicits a rescue package from the U.S. Treasury, Federal Reserve Board, and banks. Government nationalizes private banks in a vain effort to stem capital flight. Austerity measures and a peso devaluation erase fiscal and trade deficits, but cause reduced imports and recession.

1988-1993: Mexico broadens the tax base, tightens tax collection, and restrains wages and prices. As a result, the inflation rate falls, and the country's public finances improve. A combination of U.S.$3.5 billion from the IMF through the Brady Plan (advocated by the U.S. Secretary of the Treasury), assistance from the World Bank, and negotiations with foreign creditor banks reduces foreign debt.

1994-1995: A series of political shocks and a devaluation in 1994 cause investor panic. The government raises interest rates to retain foreign investment, increasing payments owed by Mexican borrowers and creating a financial crisis. The government also raises taxes and the prices of many publicly provided services. A $20 billion bailout from the U.S. goes a long way toward alleviating the crisis.

1996-2000: Spending reductions begin to pay off, and the public-sector deficit becomes a modest surplus. Monetary policy is successfully geared toward reducing inflation. The value of the peso stabilizes, in large part a result of the flexible exchange-rate regime and stability in international financial markets in the late '90s.

2001-2003: President Fox prepares a fiscal reform plan, including a controversial VAT on food and medicine. His strategy is one of increased competition, a strong internal market, and strict fiscal discipline. In 2002 the peso comes under inflationary pressure -- albeit still modest at around 4 percent. The Central Bank tightens monetary policy, but the peso trades at four-year lows in early 2003.

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Categories: Overview | Political | Economic | Social | Environmental | Rule of Law | Trade Policy | Money
Graphs: Growth | Income | Inflation | Unemployment | Well-being | Trade Volume | Trade (CAB) | Debt | Spending

Related: Video | LinksView all categories for years from to | See Full Report | Print