International Finance and Financial Policy

By Hans R. Stoll | Go to book overview

14
Question and Answer Session II

Ernesto Fernandez-Hurtado: I appreciate very much the presentation of Robert Solomon, and I have just a few comments to make. I think that on the whole, as he told us, the countries, and I speak especially for my country ( Mexico), have made tremendous efforts. The balance of payments on the whole over the period improved considerably. My problem is perhaps a different one. Some countries have made all the necessary efforts to correct the messy situation and that has caused a terrific dip in personal income, which has actually been stagnant for about six or seven years in Mexico. Why is it that Mexico, which has done everything the book recommended, has not improved its position, and apparently is coming back again with a problem similar to or even worse than what we had six years before?

The domestic type of adjustment that in Mexico succeeded for nearly four years consisted of devaluing the currency, but not of increasing domestic interest rates. We have now been forced to increase interest rates in order to avoid capital flights, and this has actually increased tremendously the domestic overall deficit of the country. The traditional system where we had to devalue worked beautifully for about four or five times. After the devaluation, exports increased, imports decreased, domestic activity actually grew, but the domestic fiscal deficit was not increased. By changing that policy to another one where we actually resorted to interest rate increases in order to avoid capital flight, we are in a worse situation because of domestic inflation and a very large domestic debt, some of which we did not have at the beginning of the process. I think this has not been sufficiently explored by the academics. If we analyze some of the schemes of most of the countries in Latin America, I think that the scheme of Mexico in one way or another fits very much into this scheme that I've presented to you. My contention is that if we do not change these

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