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NAFTA, the Peso Crisis, and the Contradictions of the Mexican Economic Growth Strategy

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Abstract

This 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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File URL: http://www.economicpolicyresearch.org/scepa/publications/workingpapers/1996/cepa0103.pdf
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Bibliographic Info

Paper 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.

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Length: 55 pages
Date of creation: Jul 1996
Date of revision:
Handle: RePEc:epa:cepawp:1996-04

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Keywords: Mexico; NAFTA; economic crisis; exchange rates; inflation; income distribution;

References

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  1. Gary Clyde Hufbauer & Jeffrey J. Schott, 1992. "North American Free Trade: Issues and Recommendations," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 71.
  2. Taylor, Lance, 1985. "A Stagnationist Model of Economic Growth," Cambridge Journal of Economics, Oxford University Press, vol. 9(4), pages 383-403, December.
  3. A. Asimakopulos, 1975. "A Kaleckian Theory of Income Distribution," Canadian Journal of Economics, Canadian Economics Association, vol. 8(3), pages 313-33, August.
  4. Robinson, Sherman & Burfisher, Mary E. & Hinojosa-Ojeda, Raul & Thierfelder, Karen E., 1993. "Agricultural policies and migration in a U.S.-Mexico free trade area: A computable general equilibrium analysis," Journal of Policy Modeling, Elsevier, vol. 15(5-6), pages 673-701.
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Cited by:
  1. Penelope Pacheco-López & A.P. Thirlwall, 2004. "Trade Liberalisation in Mexico: Rhetoric and Reality," Studies in Economics 0403, Department of Economics, University of Kent.
  2. Robert A. Blecker, 2006. "Macroeconomic and Structural Constraints on Export-Led Growth in Mexico," Working Papers 2006-05, American University, Department of Economics.

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