Essay on The Economic Impact of the Mexican Peso Crisis

The price of goods in dollar-equivalent pesos in Buenos Aires, the capital of the country, was significantly above that in New York City: taking the exchange rate, a product in Argentina was much more expensive than a product in New York City. With the exchange rate of Argentine austral at 10,000 to the dollar, people were able to purchase more goods, but when it renamed the currency to “peso” people were only able to buy less goods because prices remained high. Argentinean inflation remained higher than the U.S

As a middle-income nation that has for the most part avoided military and political conflict, Mexico should financially be doing much better. In 1994, Mexico joined the Organization for Economic Cooperation and Development (OECD). This organization is comprised of pretty wealthy countries and with Mexico’s induction, the world expected Mexico to improve economically and head in the same direction as the other countries that are part of the OECD. Economically, Mexico had a rough backstory. In 1982, there was a sovereign default which collapsed the currency as well as Mexico’s GDP. This led to many changes in the economy. The government started to withdraw its presence in the economy and embracing global markets. After the default, there were many macroeconomic stabilization issues from which an independent central bank and more developed financial markets emerged. Because of this, Mexico’s economy seemed to be headed upward. The government lowered inflation, controlled its spending, reduced its debt to other countries and increased trade. The only issue with all of this is that there was no economic growth.

This research paper will describe the demography, labor force and the business cycle of Mexico. Mexico is a federal republic, and it consists of 31 states and the Federal District. The Constitution established separation of powers. The country itself has a perimeter of 761,602 square miles. Mexico underwent an increase in purchasing power living standards, as well as reforms in energy and telecommunications passed by recently elected President Enrique Peña Nieto. Besides the reforms, the manufacturing sector

My research paper will briefly describe the country of Mexico by giving an overview of the country, their history, system of government, and their economic system. I will be reviewing which stage of the economic business cycle (peak, depression, trough,or recession) the country of Mexico is in and what the main reasons why they are presently in this stage. I will then elaborate on one of the possible causes and how it has affects Mexico’s GDP (gross national product), pricing structure, job market, economic growth, and international balances. Lastly, I will give my suggestions about some possible solutions to how Mexico can correct the challenges that have occurred and are occurring within their economy.

Before the start of the crisis, Mexico from 1988 to 1994 enjoyed a surplus of economic achievements. Mexico during that time was going through an economic reform by taking responsibilities of huge reform policies and deregulations. Due to the reform and stability of macroeconomics, Mexico rapidly reduced inflations and increased improvement in the public sector by having the exchange rate policy under the Pact of Stability and Economic Growth to sustain economic growth. In order for Mexico to be part the international capital market, President Miguel de la Madrid’s liberalized trade with the developed world These reforms involved the peg exchange rate regime, liberalization of trade and capital flows, enhanced property rights, reduced marginal income, value-added tax rates, and cuts in government spending. Most important of the reform was that the government reduced import tariffs as part of the Uruguay round of trade negotiations under the General Agreement on Tariffs and Trade (GATT). The President also implemented a series of reforms that regulated the inflow of portfolio capital and foreign direct investment into the Mexican

The inadequacy of foreign exchange damaged the Mexican government foreign debt service and thus causing an exchange rate crisis. This exchange rate crisis also caused the country to devalue peg in the 1954,1976 and 1982 as it was unable to pay its debts.

In 1991, India faced an economic downfall which resulted in a devaluation of their currency. The Indian rupee decreased in value by 9% and not so long after that, the value of the rupee went down to 11%. Their economic downfall began when the rupee was fixed to other common trading partners. A series of Indian balance issues caused the devaluation. Since the devaluation,

This financial crisis mainly resulted from some domestic macroeconomics problems and immature national financial markets, influences of international foreign markets, and crony capitalism between government officials and big-business owners and international gamblers’ actions. The high inflation rate in Asian countries rises the price of goods, and when their currency exchange rates pegged to US dollars, the exports became more expensive. The domestic production decline, unemployment rate increases. Foreign countries refuse to lend loans, force them to repay and devalue to become more competitive. Immediate ‘speculative attack’ lead speculators suddenly purchase large amount of foreign currency, as the foreign currency value increase more, the domestic money holders lose more. The Asian financial marketplaces were becoming dependent on foreign capital, foreign investors motivated to copy peers, when some investors change investment decision, it can produce insecure, dramatic, destabilizing swings of inflows and outflows. In the developing countries, it 's common some government officials give relatives who own major banks or firm low-cost loans or bail them out when their firms’ in trouble. Usually the major banks and firms didn’t care on investing on high risk projects then take earning, but push losses to taxpayers when it happens.

This paper argues that the Mexican peso crisis of December 20 should have been expected and foreseeable. In the year preceding the crisis, there were several indicators suggesting that the Mexican economy and peso were already under extreme pressure. The economy bubble was ballooning to burst so much so that it was simply a crisis waiting to happen.

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].

Many businesses failed to guarantee returns and profitability. Due to the high rates of economic growth and the booming economy, private firms and corporations looked to finance speculative investment projects. However, firms overstretched themselves and a combination of factors caused depreciation in the exchange rate as they struggled to meet the payments.

The Asian Crisis of 1997 and 1998 affected many of the East Asian and South East Asian countries surprised many. This was due to the fact that in the early and mid-1990s these same countries were lauded as model economies with high Gross Domestic Product (GDP). Yet within a space of a few months in mid-1997, the currency crisis become a financial/economic crisis as many of these countries currencies were greatly devalued resulting in the contraction of their economies. However, the severity of the Asian Crisis was not uniformly felt.

Monetary instability has been a factor in Argentina since the 1950s. The period of high inflation, which at its peak was 444%, that starts with the military dictatorship in 1976 and peaks during Raul Alfonsin in 1989 at 3080% was unprecedented. However, the “solutions” that came about in the early 1990s to solve this inflationary problem had severe unintended consequences. Deflation for 3 consecutive years brought about a recessive spiral that culminated in the biggest sovereign debt default in history. The objective of this paper is to investigate the monetary policy and balance of payment crisis of Argentina, and to research its impact on inflationary oscillations, specifically in the inflation period of the 1970s, hyperinflation period of the 1980s and the deflation period of the 1990s.

One project of the International Monetary Fund was a series of loans given to the country of Argentina in the 1990s through 2001. In the 1990s many investors and brokers looked to Argentina for investments as they rated its economy as one of the world 's strongest (Blustein, 2003, Aug 3). It was at this time that Argentina first started to follow the International Monetary Fund formula for economic stabilization in development including reducing budget in balance of payment deficits, raising interest rates, reducing inflation, privatizing state assets, and reducing trade barriers and regulation on capital flows in and out of the country (Paddock, 2002, p. 158). These policies helped reduce the hyper-inflationary levels that Argentina had reached during the 1980s. This positive outlook may have prevented a needed change in the economic policies when the effects of the Mexican peso crisis in 1995 placed Argentina 's economy in a brief recession. It wasn 't until 1998 that Argentine policymakers discussed the country 's finances with a senior official of the International Monetary Fund who sounded the alarm that the country might be headed for an Asian style melt down. However despite the warning significant economic changes were not made, in part due to the confidence that money could be easily acquired from the International Monetary Fund (Blustein, 2003, Aug 3). In 1999 the financial

El problema no es nuevo, las primeras señales de alarma sonaron antes del lanzamiento del euro en 1999. Incluso, muchos economistas se oponían a una creación prematura del euro porque no tenían un nivel de integración política y económica que pudiera sostener la moneda. Lo cual no ha cambiado.