Mexico: From Stabilized Development to Debt Crisis

Background Information Mexican Revolution of 1910 Caused by unequal distribution of wealth Lower and Middle class revolted against 30-year Dictator Porfirio Daz Over 1 million people died DICTATORSHIP IN MEXICO ENDED Constitution of 1917 Government owns all land mineral deposits Foreign ownership of land = heavily restricted Government created minimum wage, maximum work hours, and union rights Emergence of Institutional Revolutionary Party (PRI) Changes in Economy After WWII, Mexico wanted to: Reduce dependence on raw material exports and manufactured goods imports They did this by: Increasing tariffs to protect newly emerging manufacturing sector Providing low-interest, long-term loans for manufacturing FDI increased fivefold from 1950-1970 because of high tariffs Countries like the US began investing directly into Mexico By 1972, more than half of the 300 largest manufacturing firms were controlled by foreigners Tight fiscal and monetary policy and a pegged exchange rate kept inflation low 1. What were the causes of debt crisis in Latin America in 1982? Underlying problems began to manifest in the mid-1960s Growth in Mexico began to slow During 1965-1970, the growth of agricultural production declined to only 1% per year, far below the population growth rate Exports of manufactured goods became stagnant Economy became more dependent on imported capital goods and intermediates Between 1965 and 1970, the current account deficit ballooned from $367 million to $946 million Mexican social landscape also changed Industrialization led to increased urbanization In 1950, 57% of the population lived in rural areas By 1970, only 41% of the population lived there In 1987, 70% of the population lived in cities, 35% in Mexico City alone Population grew at a rapid annual rate of 3.1% from 1965-1980, and 2.2% in the 1980s In the summer of 1968, a series of peaceful student demonstrations culminated in the armys massacre of hundreds of protesters PRIs (Institutional Revolutionary Party) use of outright repression resulted in a serious loss of legitimacy and precipitated greater opposition to the regime Presidents Luis Echeverria and Jose Lopez Portillo each attempted to restore trust in the PRI They tried to accommodate the growing and completing claims of different groups on national resources through aggressive expansionary fiscal policies

This led to: An increase in spending on healthcare and education A brief review of land reform Limited political space granted to independent unions and opposition parties Revenues did not grow to match the increasing government spending of the country Fiscal conservatism of previous administration was abandoned Fiscal and current account deficits began to appear Inflation rose to about 30% To finance the deficits, the Mexican government borrowed from abroad which increased Mexicos foreign indebtedness By August 1976, the situation in Mexico was unsustainable For the first time since 1954, the president was forced to devalue the peso To address the economic devaluation crisis, a standby loan agreement was reached between the Mexican authorities and the IMF Collapse February 1982, President Lopez Portillo forced to devalue peso Peso devalued again on August 15, 1982 Despite the devaluation, by June and July, capital was leaving the country up to $2 million to $400 million a day Mexican government announced that it could no longer meet interest payment on its foreign debt Mexico owed payments of $88 billion on debt which was double its liquid reserves, Mexico signed a deal with IMF

2. How did Mexico escape from the debt crisis? President Miguel de la Madrid reduced public spending, tried to stimulate exports, and foster economic growth However, trade deficit, high interest rates, and scarce credit were hurting recovery After 6 years of struggle, in 1988, inflation was under control, prices were stable, and fiscal and monetary policies were stable Even after increased stability, FDI did not improve In 1989, President Carlos Salinas de Gortari announced plan for economic growth and lowering debt The plan was to encourage private investment from citizens He lowered debt, lowered borrowing costs, and reformed the banking sector This all triggered growth and helped Mexico get out of the crisis 3. What triggered Mexicos pesos crisis in December 1994? Began in December 1994 The peso was devalued The exchange rate was switched from fixed rate to floating rate Causes High spending and large deficit and low oil prices Uncertainty about quality of credit extended by Mexican banks. Armed led rebellion caused investors to be wary of Mexicos stability

High Spending 1994 was the last year of the 6-year administration of Carlos Salinas de Gortari PRI tradition on an election year, launched a high spending splurge and a high deficit To finance the deficit, Salinas issued a type of debt instrument denominated in pesos but indexed to dollars Banking Concerns Mexico experienced lax banking or corrupt practices Some members of the Salinas family collected enormous illicit payoffs Rebellion The EZLN, was an insurgent rebellion, Zapatista Army of National Liberation They officially declared war on the government on January 1. The armed conflict ended two weeks later The grievances and petitions remained a concern, especially amongst investors Solution Mexico received loans totaling $50 Billion, $20 Billion coming from the US in 1994 By 1996, the economy was growing, and peaked at 7% growth in 1999 In 1997, Mexico repaid all US Treasury loans ahead of schedule