NAFTA, the Peso Crisis, and the Contradictions of the Mexican Economic Growth Strategy
AbstractThis paper analyzes the causes of the massive peso devaluation of December 1994 and the ensuing economic crisis in Mexico. The paper argues that, while earlier devaluation might have been helpful, Mexico's economic growth strategy in the early 1990s was fraught with internal inconsistencies that made a collapse of that strategy inevitable. Especially, Mexico's use of the nominal exchange rate as an "anchor" to control inflation resulted in a real overvaluation of the peso in 1990-94, which combined with the liberalization of foreign trade led to unsustainable current account deficits financed by volatile inflows of "hot money." Since the devaluation, the Mexican government is counting on increased net exports and direct foreign investment to be the "engine of growth," while maintaining tight fiscal and monetary policies that suppress domestic demand in order to control inflation. The paper argues that Mexico is trying an economic strategy based on a redistribution of income from wages to profits, and evaluates the prospects for this regressive redistributional strategy to succeed or fail.
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Bibliographic InfoPaper provided by Schwartz Center for Economic Policy Analysis (SCEPA), The New School in its series SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. with number 1996-04.
Length: 55 pages
Date of creation: Jul 1996
Date of revision:
Mexico; NAFTA; economic crisis; exchange rates; inflation; income distribution;
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Studies in Economics
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