The Mexican Economy Essay, Research Paper

The Mexican Economy

On December 20, 1994, in an attempt to make Mexican products more competitive, Mexican President, Ernesto Zedillo Ponce de Len, devalued the Mexican Peso. Unfortunately, attempts at keeping the Peso to only a fifteen percent devaluation failed. The Peso dropped almost forty percent (Roberts, 1). It went from 3.5 to almost 7.5 peso’s to the dollar before it stabilized. The devaluation not only sent shockwaves through the Mexican economy, but through the rest of the world. Why should the world now risk it’s money to save Mexico? Why not just let the Mexican economy and government collapse?

To calm these shock waves United States President Bill Clinton, acting on his executive order, organized an approximately $49.5 billion aid package ($20B U.S., $17.5B International Monetary Fund, $10B BIS, $1B Consortium

of Latin American countries, $1B Canada) to Mexico (Department of State Dispatch, 78). This move could make globalization a friend or a foe in Mexico’s case. Friend, because it opens opportunities for foreign countries

and companies to further expand their economies and influence. Foe, because one country’s economic problems is the world’s economic headache. Unfortunately, it seems that the latter prevails.

The Mexican government is broke, citizens unhappy, rebels are itchy, and opposition leaders are gaining influence. All these are ingredients to a bad situation getting worse–without money or influence, the Mexican government is bound to be overrun.

Mexico over the past few years has gone from a totally corrupt and controlling government to a more democratic, privatized, and deregulated government. This has opened Mexico up to greater economical prosperity. Everything from government run factories to banks have been sold to foreign and Mexican investors, willing to pay high premiums for these assets.

With the threat of rebels in the south or the Institutional Revolutionary Party (PRI) possibly overthrowing the government, the rewards that foreign investors were about to reap from the large scale Mexican privatization

were quickly fading, hence the devaluation of the Peso in 1982. Who wants to invest in Mexican institutions if the government no longer has the power to protect them and insure their prosperity?

The socialist party managed to take control of the government and nationalized everything in sight, costing investors billions of dollars in lost property (Roberts, 3). Investors were facing the gloomy possibility of losing billions, even trillions of dollars to nationalization. Mexican stocks, debt, and currency would be rendered worthless.

If a socialistic government were to take control of Mexico, then every other rebel group and socialist party in Latin America would now seize this opportunity and throw their own rebellions–possibly erupting a situation

in Latin America where not only the moneys, but the militaries of the world would be needed to once again bring stabilization to this region of the world. This would give new meaning to the words: foreign direct investment. Instead of using money to stabilize and grow underdeveloped economies, the world would be using blood.

With the globalization of products follows the globalization of stocks, foreign debt, and currency: where one country’s stocks, bonds, and currency are traded in another country’s market. This was the case with Mexican securities. Many Mexican stocks were traded on foreign exchanges, debt was financed with foreign loans, and currency was changing hands all over the world.

The December 20th devaluation of the Peso sent the Bolsa (Mexican Stock Market) plummeting–but things didn’t just stop there. Upon opening, other markets began to plummet also. Mexican stocks (i.e. Telephonos de MMexico, Grupo Televiso, Grupo Simek, etc.) traded on foreign stock exchanges began to drag the exchanges lower. Investors fearing that the peso’s devaluation will not only affect Mexican stocks, but the stocks of foreign companies doing business there, began withdrawing billions of dollars out of these stocks (Lane, 16.)

Not only did the stock markets suffer, but the debt markets also began plummeting, especially in emerging markets such as Argentina, Brazil, Chile, and etc. Investors wary that the situation in Mexico could also spread

to these other developing countries, were no longer willing to except the risk of financing these countries at current interest rates. They were demanding higher interest, and sent the debt of these developing countries

spiraling downward. Yields were reaching levels of thirty percent or more, making it almost impossible for these countries to further finance their development, thereby almost bringing development to a standstill (Lane,

17.)

Along with the stocks and debts of countries dropping, the currencies of nations with high debt began to devalue against stronger nations. The United States was one of these countries. Investors fearing that any furthe

r debt defaults by Mexico would place the burden of repaying these loans on the United States shoulders sent the dollar to new post World War II lows against the Japanese Yen and German Mark (Zimmerman, 58.)

Besides the U.S. currency value experiencing a drop, countries with debt exceeding Gross Domestic Product (GDP), such as Italy, France, and Portugal were watching there currency falter. Warnings and threats of high infl

ation all over the world were just waiting to happen.

Inflation reaching over sixty percent in Mexico, combined with the devalued peso, made imported products unreachable by most of the Mexican citizens. With the inability of most Mexicans to purchase these imported goods,

economies which highly depended on Mexicans purchasing their exported products now faced the threat of increased unemployment and a possible recession of their own. With these types of consequences spreading to economie

s closely tied to the Mexican economy, it would only be a matter of time before economies that were closely tied to these economies began suffering the same consequences.

Repurcussions like these began to send the whole world into a recession. And the victims of these consequences were the economies of the southern states bordering Mexico. Texas (40% of exports), Arizona (25% of exports), New Mexico (20% of exports), and California (10% of exports) were seeing unemployment rise and revenues shrink (McWilliams, 2.) With conditions worsening in Mexico, the illegal immigration to these states also would increase, thus forcing the states’ own weakening economies to pay for the support to these illegal immigrants. Further, this would take away money and jobs from the citizens of the United States.

Textile companies of South America were also seeing orders slow down. With sales slowing, interest rates rising for temporary financing, and no stabilization in sight companies faced negative growth or even bankruptcy.

Workers were being laid off to down size these companies and better cope with the slowdown. This further weakened foreign investors’ confidence in the Mexican economy, turning the whole ordeal into a crisis.

Although the Mexican Peso Crisis brought a huge migraine to the world, it wasn’t without its advantages. It also brought opportunities to companies that could not afford to invest in Mexico before. With the devaluation of the peso, Mexican assets became cheaper. It has allowed companies that could not expand into foreign markets, because of the expenses associated with buying property, land, and equipment in that market, to be able to expand into Mexico because of how cheap the peso has made everything. Of course this was a great risk, but without risk there is no reward.

The crisis has also opened the opportunity for Mexico to become one of the major exporting countries in the world. With the peso so low, and no return to old values anytime soon, it is cheaper for companies to export out of Mexico than anywhere else.

These opportunities will not only help small foreign companies, but it will help begin reviving the Mexican economy.

The consequences of this crisis greatly outnumber the opportunities that have been caused by the devaluation. But in today’s financial world, we must look out after everybody because their money will eventually come right around to the United States. If one financially depressed country cannot complete the circle, the rest of the world will not see its financial return. This is precisely why the U.S. backed loan package was necessary. Without the aid, Mexico would have sunk further towards a depression and governmental collapse–thus breaking the economic cycle and dragging the rest of the world down with it. Even though the nations of the world would have eventually recovered from a global economic breakdown, who would want the headache? Who would want to suffer through another depression or, even worse, a possible cold war?

By giving Mexico the aid package, it allowed Mexico to pay back their high interest loans and begin reviving their economy: creating new jobs and attracting new foreign investments. The whole world avoided an inevitable financial catastrophe by sending aid to Mexico.

With globalization comes risk and reward. It is too late to turn back to isolism because all the economies of the world are too closely married to each other. And if the world is willing to take the risks that are associated with the rewards, then one day we will be able to make a perfect globalized economy, and avoid further economic catastrophes. Now that could mean that financial catastrophies may occur on a global scale, as was the case with the Mexican Peso Crisis, but by that token it also means that financial rewards will flourish with greater magnitude.

Works Cited

Work Cited

“U.S. Aid Package to Mexico.” Editorial. U.S. Department of State

Dispatch. 6 Feb 1995: 78 – 79.

Charles Lane. “Who Lost Mexico.” The New Republic. 20 Feb. 1995:

16 – 18.

Tim Zimmerman. “The art of the deal.” U.S. News & World Report.

13 Feb. 1995: 57 – 61.

Gary McWilliams. “A BORDER TOWN FEELS THE PESO’S PINCH.” Business Week. 6 Mar 1995: America Online.

Paul Craig Roberts. “MEXICO: DON’T BLAME SALINAS FOR ZEDILLO’S MISTAKES.” Business Week. 4 Mar 1996: America Online.