Mexico Crisis

11/11/2015

11/11/2015

Yağmur uzun

Yağmur uzun

Mexico: The Tequila Crisis 1994-1995

Mexico: The Tequila Crisis 1994-1995

Contents

1 What cause Mexico's peso crisis of December 1994? 2

2 Have capital inflows helped or hindered Mexico's development strategy? 2

3 How should the Mexican authorities have responded to the crisis? 3

4 Can crises of this type be avoided? Are controls on capital a desirable response? 4

What cause Mexico's peso crisis of December 1994?

Too rapid liberalization

There are many reasons which contributed to the crisis in Mexico in’94-95. But, I would like to begin with the process of rapid liberalization which started in early ‘90s in the financial sector, capital account and in the banking sector. All of these changes were too quick for the economic system to adjust and deal with the large inflows of capital. It can be argued that Mexican economy was dealing with the crisis, high debts, stagnation,…etc. for so long that the officials wanted to turned the economy with these rapid changes. However, as it can be seen from the result, the success can not be achieved with rapid and comprehensive changes, on the contrary, what the officials should have done was targeting the most important constraints blocking economic growth first and then applying the changes in accordance with these constraints and made gradually by making sure that the necessary experience, control systems…etc. are there (as in the case of banking deregulation of Mexico, the necessary control systems, human capital….etc. were not there).

Mexican peg

Another component of the Mexican reform strategy was to fix the value of the Mexican peso to the U.S. dollar in order to provide foreign investors confidence that their investments will not lose value and to fight with inflation for which the Mexican government was committed. However, in a developing country like Mexico which was running large current account deficit,...