The Economic Context of the Mexican Crisis

In December of 1994 Mexico entered its second major financial crisis in as many decades, requiring painful economic adjustment similar to the debt crisis of 1982. As in the previous crisis, a large current account deficit and capital outflows forced the Central Bank to retire from foreign exchange markets and allow the currency to devalue. The crisis of December 1994 was a surprise to many observers of the Mexican economy, and not least for the Mexican Government. A number of distinguished economists had predicted that some adjustment had to be made, but few (if any) envisioned a correction as severe as the one that took place. This paper presents a historical overview of economic reform in Mexico leading up to the financial crisis of 1994, beginning with trade policy and complementary policies for the liberalization of the domestic market. The principal outlines of macroeconomic reform and stabilization are then reviewed, leading to a brief account of the recent financial crisis and recent macroeconomic adjustment. This is followed by a brief review of recent developments in the structure of trade, bilateral trade relations and foreign direct investment. The paper concludes with some observations about Mexico\u27s recovery from the 1994 crisis