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Liberalization, Growth, and Financial Crises: Lessons from Mexico and the Developing World

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Author Info

  • Aaron Tornell

    (University of California, Los Angeles)

  • Frank Westermann

    (CESifo, Munich)

  • Lorenza Martinez

    (Banco de México)

Abstract

Although the case for trade liberalization is now well established, the case for financial liberalization is not, because the latter is associated with lending booms and crises. Some critics invoke as evidence the recent weak growth of Mexico, a prominent liberalizer. We argue that liberalization is beneficial despite the occurrence of crises. First, we show that financial liberalization has typically followed trade liberalization, and that both have led to faster growth, despite more frequent booms and busts. Second, we present a model that shows why, in countries with severe credit market imperfections, liberalization leads to faster growth and, as a by-product, to financial fragility. Third, comparing Mexico with this international norm, we show that liberalization and NAFTA have induced faster growth and investment but have not been enough: lack of structural reform and a protracted credit crunch generated bottlenecks that blocked further growth and led to a slowdown in exports.

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Bibliographic Info

Article provided by Economic Studies Program, The Brookings Institution in its journal Brookings Papers on Economic Activity.

Volume (Year): 34 (2003)
Issue (Month): 2 ()
Pages: 1-112

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Handle: RePEc:bin:bpeajo:v:34:y:2003:i:2003-2:p:1-112

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Related research

Keywords: Mexico; bank; growth; financial crisis; macroeconomics;

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Citations

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Cited by:
  1. Katharina Diekmann & Frank Westermann, 2010. "Financial Development and Sectoral Output Growth in 19th Century Germany," Working Papers 86, Institute of Empirical Economic Research.
  2. Nannette Lindenberg & Frank Westermann, 2009. "How Strong is the Case for Dollarization in Costa Rica? A Note on the Business Cycle Comovements with the United States," CESifo Working Paper Series 2785, CESifo Group Munich.
  3. Lars Calmfors & Giancarlo Corsetti & Seppo Honkapohja & John Kay & Willi Leibfritz & Gilles Saint-Paul & Hans-Werner Sinn & Xavier Vives, 2004. "Acceding Countries: The Road to the Euro," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 119-136, October.
  4. Raoul Minetti & Matteo Iacoviello, 2010. "Foreign Lenders in Emerging Economies," 2010 Meeting Papers 1050, Society for Economic Dynamics.
  5. Prof. Frank Westermann Ph.D., 2012. "Linkages between Sectoral Output Growth and Financial Development in Nepal," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 24(2), pages 15-30, October.
  6. Timothy J. Kehoe & Felipe Meza, 2011. "Catch-up Growth Followed by Stagnation: Mexico, 1950–2010," NBER Working Papers 17700, National Bureau of Economic Research, Inc.
  7. Timothy J. Kehoe & Kim J. Ruhl, 2010. "Why Have Economic Reforms in Mexico Not Generated Growth?," Journal of Economic Literature, American Economic Association, vol. 48(4), pages 1005-27, December.
  8. repec:nrb:journl:v:24:y:2012:i:2:p:2 is not listed on IDEAS
  9. ince, meltem, 2011. "Financial liberalization, financial development and economic growth: An empirical analysis for Turkey," MPRA Paper 31978, University Library of Munich, Germany, revised 05 May 2011.
  10. Pamela Góngora Salazar, 2010. "Determinantes de la volatilidad en el producto: evidencia empírica," VNIVERSITAS ECONÓMICA 008297, UNIVERSIDAD JAVERIANA - BOGOTÁ.
  11. Aaron Tornell & Frank Westermann & Lorenzo Martinez, 2004. "Nafta and Mexico Less-than-Steller Performance," UCLA Economics Working Papers 833, UCLA Department of Economics.
  12. Falko Fecht & Hans Peter Grüner & Manfred Jäger & Frank Westermann, 2009. "Bad Banks: Überzeugt das Konzept der Bundesregierung?," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 62(13), pages 03-13, 07.
  13. Dieter Gerdesmeier & Hans‐Eggert Reimers & Barbara Roffia, 2010. "Asset Price Misalignments and the Role of Money and Credit," International Finance, Wiley Blackwell, vol. 13(3), pages 377-407, Winter.
  14. Vessela Todorova, 2011. "Theoretical Link between the Economic and Financial Crises in Evolution," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 4, pages 55-74.
  15. Nitin Gupta, 2011. "The Differential Effects of Financial Development on India's Industrial Performance," ASARC Working Papers 2011-12, The Australian National University, Australia South Asia Research Centre.
  16. M. Ayhan Kose & Christopher M. Towe & Guy Meredith, 2004. "How Has Nafta Affected the Mexican Economy? Review and Evidence," IMF Working Papers 04/59, International Monetary Fund.

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