Essay on Mexican Peso Crisis: Irregularities of Deregulation

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Mexican Peso Crisis: Irregularities of Deregulation It is one thing to liberate an economy or a market; it is another to lift all regulations on such market. Economic liberalization should be done in an appropriate, intelligent manner. The lack of proper regulation can lead to a snowballing effect where a seemingly trivial matter can lead up to a terrible outcome. This was the case of Mexico in 1994 where birth was given to the “Tequila Effect”. What were the conditions in the country that gave way to this crisis? Could the crisis have been avoided? Perhaps under a more strictly regulated economy Mexico’s financial crisis could have been prevented, and if not, it could have been toned down in severity. The government’s decision to…show more content…
It is questionable whether it was appropriate or not to go ahead with so many changes in the economic structure all at once. Privatization of state-owned firms, including the bank sector, took place, and plus the country opened up to investment from abroad both in the form of direct as well as portfolio investment [1]. For the first time in history, foreigners were allowed to hold Mexican government bonds and shares in private companies. Suddenly, Mexico became the recipient of massive capital inflows[2]. Between 1990 and 1993 Mexico received a total of $91 billion in overall investment; of that total 67% was in the form of short-term portfolio investment while the rest was in the form of foreign direct investment[3]. [1] Froot, K, “The 1994-95 Mexican Peso Crisis,” 2 [2] Froot, K, “The 1994-95 Mexican Peso Crisis,” 8 [3] Froot, K, “The 1994-95 Mexican Peso Crisis,” 2 But all was not well. A series of unexpected events, and poor foresight led to the eventual collapse of the system. Politics, it seems, was the driving force for many of the policies being implemented. Mexico was adopting a firm stance on its exchange rate to increase investor confidence and to tackle inflation, but more importantly, to look reasonably stable in order to be able to join the Organization for Economic Co-operation (OECD)[1] which fell smoothly in line with President Salinas’ neo-liberal strategy. This exchange rate situation left the peso

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