The impact of the Mexican crisis on trade, agriculture, and migration

This paper uses a two-country, computable general equilibrium (CGE), trade model to analyze the impact on Mexico and the U.S. of the precipitous peso depreciation in late 1994 and early 1995, and of the policy response to the crisis. The model includes explicit treatment of agricultural policies in the two countries, and of labor-market linkages, including rural-urban migration within Mexico and Mexico-U.S. migration. We explore “hard,” “medium,” and “soft” landing scenarios, which differ in the extent of assumed unemployment and fall in capacity utilization, and in the nature of the structural adjustment program in Mexico. For each scenario, we consider a range of balance-of-trade adjustments, and resulting changes in the equilibrium real exchange rate. The results indicate that both countries benefit from Mexico achieving a soft landing. It is important to achieve a new equilibrium exchange rate quickly, and overshooting is costly for both countries. The hard landing leads to major disruption of the Mexican economy and greatly increased migration to the U.S., while a soft landing yields very little additional migration. The structural adjustment program is good for Mexican agriculture, shifting resources into high productivity tradables such as fruits and vegetables. A protectionist U.S. response to the increase in Mexican exports hinders the structural adjustment process and leads to increased Mexico-U.S. migration.