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Mexico after the debt crisis : is growth sustainable?


  • Oks, Daniel*van Wijnbergen, Sweder


The story of Mexico's involvement in international capital markets is one of riches to rags and back to riches again. Four periods can be distinguished: stable, steady international borrowing through the 1950s and 1960s; heavy reliance on international loans through commercial bank syndicates from the mid-1970s until 1982; massive capital flight, zero access to private lenders, and complete reliance on official sources from 1982 to 1990; and massive return of flight capital, a continued drought in syndicated loans, but heavy expansion of foreign direct investment, portfolio investment, and bond placement. Easing the transition from the third to the fourth period was the restructuring of Mexico's external debt under the Brady deal, which ultimately reduced - and smoothened - the net transfer to foreign creditors. The authors argue that smoothening the external transfer had far more impact on the domestic economy than the reduction of debt and debt servicing per se. The financing of the expansion that ensued in the fourth period differs dramatically from what was observed earlier in Mexico's history. Foreign capital inflows were dominated by foreign direct investment and especially portfolio investment and, unlike in the second period, most inflows financed the domestic private sector. Are the current rate and pattern of borrowing - at levels unforeseen at the time of the Brady deal - a cause for concern? Is growth sustainable? To answer these questions, the authors analyze the domestic macroeconomic counterpart of the large capital inflows and high current account deficits of the early 1990s. Whether growth is sustainable depends on the level of domestic saving. But even if domestic saving increases, the transition to sustainable growth is unlikely to be smooth because the slowdown in consumption growth (associated with improved saving) is likely to be contractionary. The outcome depends on how investment and net exports respond. The authors analyze cyclical and structural factors of investment and the external sector, and their interactions with Mexico's exchange rate and monetary policy, to interpret the recession in the second half of 1993. They emerge from their analysis with cautious optimism about Mexico's medium-term prospects.

Suggested Citation

  • Oks, Daniel*van Wijnbergen, Sweder, 1994. "Mexico after the debt crisis : is growth sustainable?," Policy Research Working Paper Series 1378, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1378

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    References listed on IDEAS

    1. Kiguel, Miguel A & Liviatan, Nissan, 1992. "The Business Cycle Associated.with Exchange Rate-Based Stabilizations," World Bank Economic Review, World Bank Group, vol. 6(2), pages 279-305, May.
    2. Jeremy Bulow & Kenneth Rogoff, 1988. "The Buyback Boondoggle," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 675-704.
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    Cited by:

    1. Rudger Dornbusch & Ilan Goldfajn & Rodrigo O. Valdés, 1995. "Currency Crises and Collapses," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 219-294.
    2. Jose Noguera, 2004. "The transmission mechanism to barter," CERGE-EI Working Papers wp243, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    3. M. Wasiqur Rahman Khan & Haydory Akbar Ahmed, 2012. "Dynamics of foreign earnings, assistance and debt servicing in Bangladesh," International Journal of Development Issues, Emerald Group Publishing, vol. 11(1), pages 74-84, April.
    4. Abida Yousaf & Tahir Mukhtar, 2020. "External Debt and Capital Accumulation Nexus: Evidence from Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 59(1), pages 29-44.
    5. Sebastian Edwards, 1997. "The Mexican Peso Crisis? How Much Did We Know? When Did We Know It?," NBER Working Papers 6334, National Bureau of Economic Research, Inc.
    6. repec:eco:journ1:2014-02-19 is not listed on IDEAS
    7. Toan Quoc Nguyen & Benedict J. Clements & Rina Bhattacharya, 2003. "External Debt, Public Investment, and Growth in Low-Income Countries," IMF Working Papers 03/249, International Monetary Fund.
    8. Demir, Firat, 2006. "Volatility of short term capital flows and socio-political instability in Argentina, Mexico and Turkey," MPRA Paper 1943, University Library of Munich, Germany.
    9. Geske Dijkstra & Niels Hermes, 2001. "The Uncertainty of Debt Service Payments and Economic Growth of HIPCs: Is there a Case for Debt Relief?," WIDER Working Paper Series DP2001-122, World Institute for Development Economic Research (UNU-WIDER).
    10. Paulo Drummond & Wendell Daal & Nandini Srivastava & Luiz E Oliveira, 2012. "Mobilizing Revenue in Sub-Saharan Africa; Empirical Norms and Key Determinants," IMF Working Papers 12/108, International Monetary Fund.
    11. Serhan ÇIFTÇIOĞLU & Amin SOKHANVAR, 2018. "External Debt- Economic Growth Nexus in Selected CEE Countries," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 85-100, December.
    12. Winston Moore & Chrystol Thomas, 2010. "A meta-analysis of the relationship between debt and growth," International Journal of Development Issues, Emerald Group Publishing, vol. 9(3), pages 214-225, September.

    More about this item


    Macroeconomic Management; Financial Intermediation; Environmental Economics&Policies; Economic Theory&Research; Banks&Banking Reform;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation


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