“Mexico’s Balance-of-Payments Problem”

On April 1, 1991, Argentina’s Congress, with Domingo Cavallo as Minister of Economy, enacted the Convertibility Law (or Ley de Convertibilidad) legally adopting the currency board (Hornbeck, 2002). This legislation essentially pegged the Argentinean peso to the U.S. dollar. The government guaranteed the convertibility of the peso to U.S. dollar at a one-to-one exchange rate, limiting the printing of pesos to only those necessary to purchase dollars in the foreign exchange market. Thus, the central bank was required by law to hold foreign reserves to cover its peso liabilities (Hanke and Schuler, 2002). With this fixed exchange rate, the Argentinean government was hoping to preserve the value of their currency and stabilize inflation. The peg was initially successful, as it cured hyperinflation that occurred at the end of the 1980s and provided price stability needed for economic growth in the early 1990s. However, by the late 1990s,

According to the Washington Post, Mexico's economy has totally declined. The values of their peso have decreased radically against the U.S. dollar, growth rate has

Some background facts about Mexico: The place of advanced Amerindian civilizations, Mexico came under Spanish rule for three centuries before achieving independence early in the 19th century. A devaluation of the peso in late 1994 threw Mexico into economic turmoil, triggering the worst recession in over half a century. The nation continues to make an impressive recovery. Ongoing economic and social concerns include low real wages, underemployment for a large segment of the population, inequitable income

Between the 1940’s and the 1970’s, Mexico’s economy had been flourishing. Their inflation was at a good range and their debt was low. With the discovery of petroleum, Mexico

the Mexican agricultural industry had to compete with the far more industrialized US farm industry. Even though the amount of exported products tripled since the institution of NAFTA [according to the economist], most of those exports were maize. The United States was producing a greater amount of grain products and importing them cheaply into Mexico. The amount of American imports overwhelmed the Mexican market and forced them to sell to America and Canada. The theory the United States held was NAFTA would decrease the amount of Mexican immigration. However, this hurt the Mexican economy enough until around 2008 to force millions of Mexicans into the United States, doubling the Mexican-born population to twelve million in 2013 (Sergei, M. 2014).

Throughout 1994, Mexico lost significant amounts of reserves trying to stabilise the exchange rate. In 1989 the current account deficit was US$6 billion; by 1991 it had grown to US$15billion, before swelling to approximately US$20billion 1992 and 1993. However, after losing US$1.5billion in reserves over three days in early December 1994, the Government decided to depreciate the Peso by approximately 15%. Within days the Peso plummeted in value as the Government abandoned its new peg, sending the country into the 1994 Mexico financial crisis (Joseph & Whitt 1996).

Before the 60’s Mexico has experience a growth in their economy that was called the “Mexican miracle” because of the growth from 3% to 4% in just few time. However, after this period of growth, what followed was decades of debt. “In the late 1960s, Latin America

In the last decade we have seen dismal economic growth of less than 2 percent per year on average. This is the worst record for Mexico in 70 years, particularly shocking when compared to double-digit growth in other developing countries. We need to quickly move onto a path of sustained growth that will increase investor confidence and provide stability for an eager workforce.

This triggered the worst banking crises in Mexican history (1995-1997) and the largest depreciation of the currency in one year; from 5.3 pesos per dollar to over 10 pesos per dollar between December 1994 and November 1995 to cause the most severe recession in Mexico, and therefore ushered in the Tequila

Something evident due to the fact that the mexican peso has devalued to 65.15% against the dollar since the beginning of Peña Nieto’s term. A big downfall compared to the administration of Felipe Calderón Hinojosa and Vicente Fox Quesada, Mexico’s previous presidents. Many things have caused this, but the most recent and impactful event was when Donald Trump won the election. Trump’s views on illegal immigration and his stance on renegotiating the North American Free Trade Agreement or NAFTA really shook the mexican peso out of control. This to the point of breaking the unnerving barrier of 20 pesos per dollar. To put this into perspective, when I was about twelve years old a dollar was worth ten pesos. This severely affected the mexican people and many daily necessities would increase in price. The bus and metro prices would increase by 20% severely affecting many of the working class. Groceries and other goods would also increase in price. Even though Peña Nieto has lowered unemployment, his inadequate handling of our currency has left many mexicans unhappy. Some even losing their

The governments limited their costs by slashing social spending; education, health, social services, etc.., devaluing the national currency via lowering export earnings and increasing import costs, creating strict limits on food subsidies, cutting workers jobs and wages, taking over small subsistence farms for large-scale export crop farming and promoting the privatization of public industries. Most countries suffered a recession and often depression; and the poorest of the poor were most affected. As Latin America’s economies stagnated, per capita income plummeted, poverty increased, and the already wide gap between the rich and the poor widened further. The debt crisis seriously eroded whatever gains had been made in reducing poverty through improved social welfare measures over the booms of the 60’s and early 70’s. Poverty grew 50 percent; malnutrition 40 percent; children were increasingly recruited into the drug trade and prostitution; long-term unemployment and its adverse social effects increased; the weakening of local communities and the growth of crime and an epidemic of homicides, are but a few of the many dilemmas that the debt crisis caused.

economy, following its cycles and trends since NAFTA agreement signed in 1994 by United States, Mexico and Canada as established a strong economical and political cooperation between these countries.

Mexican dependence on the U.S. is notable. After the failure of the drive to diversify trade patterns in the 1970s and eighties (the local equivalent of Canada's Third Option policy), a 'realist' approach began to mark the nation's traditional nationalist and protectionist economy. From opposition to excessive U.S. dependence, Mexico moved to welcome it as inevitable. With time, the Mexican economy became even more dependent on the United States than the Canadian economy.2

Another important factor that affected the financial sector and would eventually contribute to the development of the Mexican Peso Crisis was that the risk premium of the Mexican economy was significantly impacted by the armed conflicts that happened in Chiapas at that time. This armed conflict led to a decline in investor confidence about business in Mexico, such that there was a decline in the investment potential of the region (Mathur, 18).

The year 1994 marks the final year of Carlos Salinas de Gotari’s administration in Mexico. In order to boost the popularity of the party in hope of garnering more votes, Salinas went a high spending splurge which led to high deficits. Mexico’s trade deficit further deteriorated due to trade liberalization through the participation in North Atlantic Free Trade Agreement (NAFTA) in 1992, Organisation for Economic Co-operation and Development (OECD) and World Trade Agreement (WTA) in 1994. Fuelled by the overvalued peso and trade liberalization, Mexico was importing at a rate much faster than it could, leading to rising trade deficits.