Balance Of Payment Problem In Mexico Economics Essay

Mexico in the early 1990 ‘s was a function theoretical account for its blossoming economic system. Within a decennary the rising prices rate dropped to a individual figure, and the authorities applied fiscal and capital liberalisation. These economic fortunes attracted singular foreign investing. Mexico ‘s hereafter seemed promising as even the NAFTA ( North American Free Trade Agreement ) offered to cut down the trade limitations between Mexico and the US. ( SzA±cs, 2006 )

However, the prostration of the Mexican economic system was merely a affair of clip, due to unsustainable pecuniary and financial policies. In December of 1994 Mexico devaluated the peso against the US Dollar. The devaluation of the peso was followed by a fiscal crisis due to the peso ‘s value dropping by 40 % , and a important rising prices. ( Curtis et al. , 2005 )

In order to analyze the job we have to take in consideration several factors that forced the government to deprecate the peso, and lead to a fiscal crisis. Interestingly, merely a few economic experts had noticed the marks of the extroverted crisis. In Mexico between 1989 and 1993 the current history shortage grew from $ 6 billion to $ 20 billion. The tremendous shortage showed that the peso became overvalued. The overestimate was a major menace as it could cut down on the exports, goad imports and lead to a crisis. ( Whitt, 1996 )

The above mentioned significantly high current history shortage is one of the most of import causes. The shortage reached about 8 % of the Mexican GDP. It is really of import to underscore that singular portion of the shortage derived from comparatively short-run capital influxs. Keeping the rising prices rate depression was the chief concern of the Mexican politicians from the early 1980 ‘s. The peso exchange rate was kept high on intent by the policymakers. The Mexican authorities applied comparatively fixed exchange rates. Furthermore, over-valued exchange rate was preferred by the policymakers as they were strongly committed to contend against rising prices. As a effect of the loose pecuniary policy of the authorities in 1994 militias decreased notably. Particularly Mexican economic experts stress among other factors the errors of the government during the devaluation period. These are called the “ mistakes of December ” . Apart from the economic causes unanticipated political events seemed to hold a major function in the development of the crisis. ( Griffith-Jones, 1997 )

These serious political events included a rebellion in a certain state of Mexico that was a great daze for the government. This motion took portion merely a few months before a presidential election. It indicated that the Mexican political stableness may be in danger. However, the sudden decease of a popular politician created political instability and a minor fiscal terror. Mexico ‘s international militias dropped dramatically from February to April 1994 due to governmental intercession. They tried to maintain the value of the peso and halt the rising prices, and they consumed in less than a month about $ 11 billion in militias ( see Chart 1 ) . ( Whitt, 1996 )

The combat at the top degree of the Mexican authorities intensified making an even more politically and economically instable environing. Such a political hazard has ne’er been sensed before, and as a effect Mexico lost another $ 8.5 billion in militias. In December 1994 Mexico faced renewed force per unit area on the peso. Among the grounds the Bank of Mexico stresses several factors such as the negative effects of higher existent involvement rates on fiscal institutes and other loaners. They emphasise the market ‘s concerns about the current histories shortage, as it was thought to be hard to finance in 1995. Meanwhile, the dialogues with the Rebels failed, which caused farther force per unit area. After losing another $ 1.5 billion in militias the government decided to devalue the peso by 15 % that lead to a fiscal crisis. ( Whitt, 2006 )

The above mentioned causes are the most common factors that are by and large emphasised by the literature. However, I find it of import to present a few more. Harmonizing to some professionals of procedure of fiscal and capital liberalisation was excessively fast. The authorities made excessively many alterations at the same clip while parallel Mexico had to cover with a big capital influx. The liberalization was carried out far excessively quickly and deficient control/taxes were utilized to deter short-run capital influx. Other factors that deepened the Mexican crisis are the imperfectnesss of the international capital markets. Although it is by and large efficient, is has some imperfectnesss, which may do over-invest or over-lend in certain markets. When the over investing is realized the effect can be a immense over-reaction that may take to serious flow diminution. ( Griffith-Jones, 1997 )

As I mentioned earlier despite the fact that the media, investors, politicians and even most of the economic experts were convinced that the Mexican economic system is stable, there were marks that showed the jobs under the surface. Therefore, it is really of import to take a closer expression to these macro-economic indexs. ( SzA±cs, 2006 )

Harmonizing to the foreign debt to GDP ratio Mexico did non hold to confront any short-run insolvency job, as it showed a positive inclination. However, the composing of the debt was worrisome, since 60 % of the entire debt originated from foreign loans. These have increased the function of guess in the Mexican economic system. The ground of the existent grasp of the currency was that the Mexican price-level has increased much more twelvemonth by twelvemonth than the foreign price-levels ( e.g. in the USA ) . As a consequence the exchange rate of the peso was 20-25 % higher than the equilibrium exchange rate. It is true that in the early 1994 it somewhat decreased, but this was no longer able to contract the spread between the nominal and existent exchange rate. ( SzA±cs, 2006 )

In the early 1990 ‘s Mexico ‘s rising prices rate was continuously higher than in the United States and this along with the peso depreciation resulted in an increasing existent exchange rate. As a effect the monetary values of Mexican merchandises increased compared to US merchandises. The monetary value degree addition forced the Mexican people to buy imported goods, und undermined the Mexican export. Besides, the authorities was non worried about the current histories shortage, as its militias in dollars were turning continuously until the terminal of 1993. ( Whitt, 1996 )

The monthly price-level addition was non really high anyhow ; it has jumped significantly merely after the crisis. Between the twelvemonth 1988 and 1994the authorities has repeatedly changed its exchange rates and applied pre-announced devaluations. After subscribing the NAFTA understanding, it was expected that the pecuniary policy would cut down the domestic rising prices and keeps the peso strong by restricting the monetary value addition of the merchandises. Although the stabilisation plan was successful the gait of monetary value diminution remained really slow, which along with the fixed exchange rate resulted in the existent grasp of the currency. That was the point where several analysts indicated that the peso grasp undermines the fight of the economic system, and sooner or later will bring forth a major crisis. ( SzA±cs, 2006 )