Mexico's Economic Recovery - How Successful Is It?

Economic Review, April 1994 | Go to article overview

Mexico's Economic Recovery - How Successful Is It?


Worldwide, many nations are struggling with high inflation, devaluation of currency, instability, and public anxiety. With the changes that have been taking place in Russia the last two years, the economic problems in that country seem to be worsening. The United States, although considered the wealthiest nation of the world, is trying to crawl out of a recession. Now Japan's boom has slowed down, and the Japanese are being more careful with their finances. As for Latin America, economic problems are a way of life.

In this context it may be surprising to read some declarations about Mexico's economic recovery. Mexico's president Carlos Salinas de Gortari stated: "We have reduced inflation from almost 200 per cent in 1987 to a level that has already reached 10 per cent and continues to fall." In his speech to the Foreign Policy Association in New York, he continued: "Since 1989, thirteen million Mexicans have gained access to electric power, eleven million to the drinking water supply, and eight and a half million to the sewage system." So some questions may arise. What does this recovery involve? Are the Mexican people improving their standard of living?

The Crisis Years

Before the '70's, Mexico was considered be economically stable. With its peso having a parity of 12.50 per dollar, the economy was basically steady, and the external debt was more or less controlled. But in the '80's, when it seemed that there should be an economic boom because of more oil being found in Mexico, paradoxically a crisis developed, and in 1987, Mexico reached its highest inflation index.

At that time it was very difficult to keep up with the demand for money, and the government continued printing currency that lost value every day. Large sums of money started to flee the country to be kept more secure in banks abroad. The devaluation of the peso was much the same as the rate of inflation. In 1992, when the exchange rate was 3,110 pesos to the dollar, the devaluation had surpassed 24,000 per cent since the '70's, when the rate was 12.50 pesos.

In the two six-year periods prior to 1988, most of the action taken by the government to solve the problems mentioned above seemed self-defeating and undermined the Mexican economy. The distrust, both inside the country and in foreign countries, started to spread, all the more so when in 1982, Mexico advised that it was not able to pay even the interest on its external debt.

Drastic Changes in the Mexican Economy

Changes have taken place during the presidency of Carlos Salines de Gortari, who took office December 1, 1988. President Salinas, an economist and graduate of Harvard University, surrounded by a group of financial experts, faced the task of restructuring the Mexican economy. There were two options to choose from: a mixed economy or a market economy. A mixed economy is one in which the State controls a greater part of the industries and services, while giving opportunity for private enterprise to exist. A market economy is one in which the country is given full freedom, and industry and the private sector are allowed to operate with minimal interference from the State. The Salinas government chose a mixed economy, reversing the process that had been pursued in previous years. The former government had loaded itself with many enterprises and service agencies that, instead of being productive, needed State subsidies in order to survive. Now private companies were given more opportunity, and therefore some State enterprises began to be sold - almost 400 up to now - which created a cash flow and eased the burden on government finances. With the privatization of enterprises and the concomitant austerity policy in public expenses, it has been possible for Mexico to refinance its external debt, which in 1993 amounted to over $ 103 billion. In this situation some countries now view Mexico more confidently as a country for possible investment.

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