Mexico's Experience Research Articles

How Has Nafta Affected the Mexican Economy? Review and Evidence

This paper provides a comprehensive assessment of the impact of NAFTA on growth and business cycles in Mexico. The effect of the agreement in spurring a dramatic increase in trade and financial flows between Mexico and its NAFTA partners, and its impact on Mexican economic growth and business cycle dynamics, are documented with reference both to stylized facts and recent empirical research. The paper concludes by drawing lessons from Mexico's NAFTA experience for policymakers in developing countries. The foremost of these is that in an increasingly globalized trading system, bilateral and regional free trade arrangements should be used to accelerate, rather than postpone, needed structural reform.

Approaches to Technology Transfer in History and the Case of Nineteenth-Century Mexico

The transfer of productive technologies from the industrial nations of the North Atlantic to the rest of the world underlay dramatic economic and social transformations in the 19th century. Technology transfer has continued to play a central role in both international economics and national development policy through the late 20th century. Yet efforts to transfer novel technologies across national borders have varied widely, with outcomes ranging from success, to significant adaptation, to failure. This article offers a conceptual model for examining cases of technology transfer, illustrated with examples from Mexico's historical experience of 1870 through 1911. Although this approach comes from an historian's perspective, it is broadly applicable to interdisciplinary interest in technology transfer.

Editors' Summary

Editors' Summary William C. Brainard and George L. Perry The brookings panel on Economic Activity held its seventy-sixth conference in Washington, D.C., on September 4 and 5, 2003. This issue of Brookings Papers on Economic Activity includes the papers and discussions presented at the conference. The first paper examines the Mexican economy since Mexico liberalized its financial markets and concludes that its disappointing performance is due, in important part, to inadequate domestic reforms. The second paper takes a fresh look at understanding the factors behind economic growth over the past forty years, using the experience of eighty-four countries at various stages of development. The third paper looks at how the U.S. productivity surge since the mid-1990s affects our understanding of productivity trends and cycles, and how this might inform future projections. The fourth paper looks for evidence of a bubble in current housing prices. After Mexico liberalized its foreign trade and financial transactions beginning in the mid-1980s and joined the North American Free Trade Area (NAFTA) in 1994, it was widely expected that exports would boom, contributing to exceptional economic growth. These expectations have not been met. Mexico experienced a financial crisis in late 1994, from which it recovered with substantial help from the United States. Its exports did rise sharply but then stagnated along with GDP starting in 2001. And on average since liberalization began, Mexico's economic growth has been unexceptional. Mexico's experience, along with the financial crises that beset a wide range of other emerging market economies during the 1990s, raised a number of still-unsettled questions about the benefits and costs of financial liberalization. Although liberalization promoted the inflow of capital from abroad, aiding economic expansion, all too often that foreign capital flowed out just as freely, precipitating crises in some countries and contributing to them in others. In [End Page ix] the first paper in this volume, Aaron Tornell, Frank Westermann, and Lorenza Martínez provide a new analysis of how liberalization affects emerging market economies. In their view, liberalization does promote growth by easing financial constraints. But in the process it adds to risk taking in the financial sector, which makes the economy more vulnerable to crisis. How much more risk, and how vulnerable the economy becomes, depend on the ability of lenders to enforce contracts with borrowers and on the prospects for a bailout of the banking sector should a financial crisis occur; these factors in turn depend on certain characteristics of domestic economic and legal institutions. The authors examine these ideas empirically and use the results to inform an extensive analysis of Mexico's recent experience. The authors begin with an empirical model of the economic linkages among liberalization, financial fragility, and growth. They use a sample of fifty-two countries whose financial markets have achieved a certain level of development, as indicated by a minimum level of activity in their stock markets, and for which data are available for the period 1980-99. The countries are partitioned into seventeen that are judged to have a high degree of contract enforceability (high-enforceability countries, or HECs) and thirty-five that have medium contract enforceability (MECs). The HECs include the Group of Seven large industrial countries and ten others for which an index of the prevalence of the rule of law exceeds a threshold value; all had liberalized both their trade and their financial markets before the start of the sample period. Many of the MECs opened their markets during the sample period, and the authors date these openings by when a trend break occurs in the country's trade or capital flows or when the ratio of trade or capital flows to GDP exceeds a threshold value. The dates identified by this process are similar to those found by earlier researchers. From these datings and from data on the economic performance of each country, the authors infer a number of stylized facts. One is that trade liberalization has typically preceded financial liberalization in MECs. Another is that both trade liberalization and financial liberalization are associated with faster GDP growth. This conclusion emerges from several specifications of both cross-sectional and panel regressions explaining growth in...

Mexico's experience with a flexible exchange rate regime

The availability of a nominal anchor and increased trade and investment flows are considered key benefits from a fixed exchange rate, while a floating exchange rate ensures freedom to use monetary policy. We show that having a flexible exchange rate has not hurt Mexico's ability to reduce inflation, develop trade, and attract foreign investment. Moreover, monetary policy has been used to address shocks on the economy with good results, while the elimination of explicit and implicit exchange rate guarantees has prevented the emergence of currency and maturity mismatches in capital flows and balance sheets.

The Dismantling of CONASUPO, a Mexican State Trader in Agriculture

In the 1990s, Mexico gradually dismantled and ultimately liquidated CONASUPO, its state enterprise in agriculture. CONASUPO was a typical less developed country (LDC) parastatal, exacting control over an important component of Mexico's food chain. This paper examines the demise of CONASUPO in the context of domestic economic reforms and trade liberalisation. It documents the process by which CONASUPO was eleminated, the political environment that made this possible, and the implications for agricultural production and trade. The paper concludes by distilling lessons from Mexico's experience for other LDCs as the liberalisation of domestic and international markets continues to unfold.

Explaining Free Trade: Mexico, 1985–1988

AbstractThis study examines Mexico's unilateral trade liberalization experience from 1985 to 1988. It traces the origins of policy change to officials in the Central Bank, who took advantage of periodic economic crises to pursue their agenda. Opposing them were bureaucrats tied to an industrial sector that also objected to substantial trade liberalization. Mexico's institutional structures influenced the balance of bargaining power as reform supporters and opponents bitterly fought to define the scope, depth, and timing of the implementation process. Successful implementation led to the emergence of business interests in favor of free trade—interests that would provide crucial backing for the North American Free Trade Agreement.

Another path to customs reform: Mexico's second inspection

This paper presents two theses about reforming customs administration in developing countries. First, that modern customs systems increasingly rely on documentary audit rather than physical control and that the private sector can improve the information needed to strengthen audit. Second, that reform of customs administration in developing countries requires building both accountability and efficiency. The widespread use of Pre-Shipment Inspection (PSI) services by developing countries and Mexico's innovative privatized second inspection supports the first thesis and Mexico's experience with privatizing a key layer of its customs administration supports the second thesis. This paper examines Mexico's recently introduced Second Customs Inspection which is a novel approach of using private firms to improve the accountability of a customs system. The Second Inspection is uniquely poised to improve both physical control and documentary audit in Mexico's customs by clearly defining the inspection as “rough justice.” “Rough justice"” is an approach to physical customs inspection that recognizes the limitations oftime and space of customs inspections prior to detailed documentary audit. Rough justice is an approach to customs administration that promotes systematic but selective review of contents and documents in the front end of the customs process (inspection) that can be done within reasonable time limits that do not unduly delay trade.

Capital flows and financial stability: the mexican experience

This paper argues that capital inflows that are not well absorbed by the private sector will cause financial instability under a fixed exchange rate regime. Whether capital inflows, particularly portfolio inflows, are good or bad as perceived by the recipient emerging market depends on how they are allocated and used. They can, if absorbed properly, contribute to a reduction in the cost of capital and to domestic capital formation and economic growth. On the other hand, they can also flood the domestic market, build up official reserves, and appreciate the real exchange rate. Moreover, they are very sensitive to political and economic shocks. Empirical analysis of Mexico's recent experience reveals that the capital influx into Mexico in the past decade did not contribute much to capital formation and economic growth. Instead, they were to a large degree absorbed by official reserves and imports for consumption. Capital inflows were a major factor in Mexico's real exchange rate appreciation. Capital flows in Mexico are found to be adversely affected by U.S. interest rates.

Policy responses to capital inflows: lessons from mexico

This paper has two basic objectives. The first is to examine the impact large inflows of foreign capital have on the economies of developing countries. This is important because international investment in many “emerging” markets has increased rapidly, particularly since 1990. The second objective is to explain Mexico's recent (1994-95) currency and financial crisis and to assess the role large capital inflows (and outflows) played in these events. In general, the paper concludes that the Mexican crisis was a direct outgrowth of the large inflows of foreign portfolio investment that followed the announcement of the NAFTA in early 1990. But while these capital inflows served as the catalyst, the policy responses adopted by the Mexican authorities to deal with these flows bear the ultimate responsibility for the crisis. Accordingly, this paper reviews the most common alternatives for redressing the effects of capital inflows on the recipient's economy and balance of payments, and uses Mexico's recent experience to draw general lessons for countries that encounter similar situations in the future.

Mexico's Experience of Setting up its Tourism Satellite Account

The main objective behind the creation of the Tourism Satellite Account of Mexico (CSTM) was the need to have access to macro-economic information in support of the strategic management of Mexico's tourist development, so as to provide greater efficiency in the programming, analysis and decision-making processes for an increasingly dynamic tourism sector that is in full expansion and developing in an openly competitive and global context. This article examines the steps taken to develop and establish the CSTM, the results obtained and the main achievements and limitations of the satellite account, within the framework of the System of National Accounts, in respect to tourism policy and the tourism sector in general. It concludes by looking at the future use and applications of the CSTM.

The Internationalization of Police: The DEA in Mexico

Little has been published on how countries react to the presence of foreign police within their borders. Ethan A. Nadelmann has written a major work on the internationalization of United States criminal law enforcement agencies; its focus, however, is on the behavior and perspectives of U.S. officials engaged in international law enforcement activities. Still, his work has provided interesting clues for my own research on Mexican policy toward drugs in the context of United States-Mexican relations.1 This article will focus on Mexico's experience with the Drug Enforcement Administration (DEA), and in particular, on how and why that United States police agency has become a powerful presence in Mexico and the source of bitter fights between Mexico and the United States over the last fifteen years. DEA'S influence, I argue, has been consequential on two fronts: on the Mexican government and its antidrug policies and on the organization and practice of drug trafficking in Mexico. Leaving aside the critical issue of how, over the last fifteen years, the DEA has modified the relationship between the Mexican government and drug traffickers, in this article I will concentrate on the influence of the agency on Mexican drug policy and on the challenge that DEA agents have come to represent for the Mexican state. That challenge is to the most exclusive, that is, sovereign, of a state's powers, namely, law enforcement. police is not only in charge of legally enforcing a country's laws; it is also the instrument of a central authority. badge and gun of DEA agents represent United States sovereign police power, which does not extend beyond American borders. Many governments have come to accept the occasional practice of hot pursuit across frontiers to arrest fleeing criminals, but very few will tolerate the exercise of police power by a foreign agency. According to Nadelmann, The presence of foreign police may be accepted, but virtually never the legal authority that underpins them in their own country. impossibility of enforcing one country's laws in another polity leads to extremely awkward situations for the DEA in Mexico, which will be described in this article.2

The Syndrome of Exchange-Rate-Based Stabilizations and the Uncertain Duration of Currency Pegs

This paper shows that some key stylized facts of exchange-rate-based stabilization plans can be explained by the uncertain duration of the plans themselves. Uncertain duration is modeled to reflect evidence showing that devaluation probabilities are higher when the plans are introduced and abandoned than in the period in between. If contingent-claims markets are incomplete, this uncertain duration distortion introduces temporary fiscal cuts with large wealth effects. Investment and employment are also distorted, and the resulting supply- side effects play a critical role. Stabilizations of uncertain duration entail large welfare costs, but they are preferred to persistent high inflation. Mexico's experience is examined in the light of these predictions.

The Technical Process of Bank Privatization in Mexico

Roughly eight years after the Mexican banks were nationalized, former President Carlos Salinas de Gortari submitted to Congress on May 2, 1990, a constitutional amendment to re-privatize commercial banks. In the course of fifteen months thereafter, controlling shares of 18 banks with aggregate assets of $128 billion were auctioned for $12.4 billion. Mexico's experience with bank privatization is considered to be very successful and stands as an example to other countries considering the privatization of their banking system. Clear objectives and the adoption of transparent and credible procedures are frequently cited as the basis for the effectiveness of the Mexican program (Barnes, 1992). Surprisingly little has been written documenting the great length to which the Mexican government went through to ensure due procedure and transparency through the entire bank privatization process. Hence, the first objective of this paper is to provide a clear and concise review of the technical process describing how Mexican banks were privatized. Specifically, the paper illustrates the procedures followed in the valuation of the banks, the registration and approval of the parties interested in acquiring these institutions and the sale of the government's equity interest. Second, we review the bidding structure for each privatization case in detail. The paper also provides an estimate of the market values for 12 banks, at the time of their auction, by examining their share prices in the vicinity of the auction time. We report that on average the winning bidders paid a 45 percent premium over the banks' estimated market values.

Mexico and export-led growth: the Porfirian period revisited

This paper examines Mexico's development experience during the 'golden age' of export-led growth in Latin America. Propelled by liberal reforms under the Porfirio Diaz regime (1877-1910), Mexico's exports expanded at unprecedented rates, and this is widely believed to have brought about rapid growth and far-reaching structural changes to the domestic economy. This paper questions this view. Using a new and more comprehensive data set, it argues that buoyant export performance had relatively little impact on key macroeconomic and sectoral indicators. The pre 1911 Mexican experience is thus shown to be quite distinct from that of other large primary producing countries such as Argentina and Canada, where rapid economic growth was largely export-led. A distinctive feature of the Mexican economy during the 1877-1911 period was the rapid

Capital Inflows, Financial Intermediation, and Aggregate Demand: Empirical Evidence From Mexico and Other Pacific Basin Countries

In trying to explain the balance-of-payments and banking crises of 1994-95 that erupted in Mexico, observers have pointed to various effects of the substantial capital inflows that took place in the preceding half decade. It has been argued that these inflows contributed to rapid monetary growth, real appreciation of the peso, and the widening of Mexico's current account deficit. In addition, by making available credit for consumption loans at a time when investment spending in Mexico was not yet ready to grow rapidly, these inflows may have contributed to the fall in Mexico's savings rate. This paper looks at the effect of capital flows on macroeconomic and financial variables in Mexico during the 1980s and 1990s and compares Mexico's experience with that of a cross-section of Pacific Basin countries. In particular, we attempt to gauge the effect of capital flows on money growth, interest rates, consumption and investment. We do find evidence of an independent effect of capital flows on monetary conditions and domestic demand, controlling for certain other domestic factors. However, these inflows appear not to have altered substantially the basic trajectories of money, consumption, and investment in the recipient countries.

Delayed Financial Disclosure: Mexico's Recent Experience

This article documents a delay in the public release of Mexican international reserve data in the months before Mexico's debt crisis at the end of 1994. The article establishes that in that year investors did not know the level of Mexican reserves before October; yet this lack of information did not seem to reduce investor confidence in the Mexican economy. The article does not establish whether the delay in releasing reserve data was due to logistical problems or to a government strategy. The possibility that the delay was strategic is evaluated by developing an economic model that captures some of the principal constraints facing the Mexican government in 1994 and that makes explicit the conflicting objectives of the government and investors. The model shows that in such an environment with private information, strategic delay can occur in equilibrium if investors are uncertain about the cause of the delay.

The Syndrome of Exchange-Rate-Based Stabilization and the Uncertain Duration of Currency Pegs

This paper conducts a quantitative examination of the hypothesis that uncertain duration of currency pegs causes the sharp real appreciations and business cycles that affect chronically countries using fixed exchange rates as an instrument to stop high inflation. Numerical solutions of equilibrium dynamics of a two-sector small open economy with incomplete markets show that uncertain duration rationalizes the syndrome of exchange-rate-based stabilizations without price or wage rigidities. Three elements of the model are critical for these results: (a) a strictly-convex hazard rate function describing time-dependent devaluation probabilities, (b) the wealth effects introduced by incomplete insurance arkets, and (c) the supply-side effects introduced via capital accumulation and elastic labor supply. Uncertain duration also entails large welfare costs, compared to the perfect-foresight credibility framework, although temporary disinflations are welfare-improving. The model's potential empirical relevance is examined further by reviewing Mexico's post-war experience with the collapse of six currency pegs.

Monetary Policy in the End-Game to Exchange-Rate Based Stabilizations: The Case of Mexico

Exchange-rate based stabilizations, while useful in accelerating the disinflation process, typically lead to overvalued exchange rates and large current account deficits. These factors, in turn, make it difficult to sustain exchange rate pegs, placing heaving demands upon monetary policy to sustain exchange-rate based programs in their later phases. This paper evaluates the extent to which Mexican monetary policy in 1994 may have loosened, or not tightened sufficiently, in the lead up to the devaluation of the peso that December. Using econometric models of the demand for money, we find evidence that the high growth of the monetary base in 1994 reflected strong positive shocks to the demand for money, not to its supply. Next, we estimate a monetary policy reaction function for Mexico. Based on this estimate, we argue that interest rates rose only moderately less in 1994, in response to downward pressure on the peso and on international reserves, than was predicted by the authorities' reaction function. This result is qualified somewhat by our finding that if interest rates are modeled as reacting to reserves net of Tesobonos, rather than gross reserves, the measured deviation of actual from predicted interest rates would have been much greater. However, the relative complacency with which both the authorities and the market viewed the build-up in Tesobonos, at least until late in 1994, suggests that the reaction function based on net reserves probably does not capture "normal" monetary policy behavior. Our findings suggest that in order to have maintained the peg, the authorities would have needed to intensify their response to exchange market developments--that is, to alter their reaction function--at a time when concerns over the health of the banking sector, and of the economy more generally, would have pointed to a relaxation of monetary policy. Insofar as such tightenings of monetary reaction functions are difficult to achieve, Mexico's experience suggests that policymakers relying on the exchange rate as a nominal anchor probably should be prepared either to abandon that anchor or tighten monetary policy well before speculative pressures intensify.

Soap Operas for Social Change: Toward a Methodology for Entertainment-Education Television

Foreword Preface Introduction Formulation of the Entertainment-Education Strategy for Development Communiation in Mexico Theoretical Components of Entertainment-Education Soap Operas Assembling an Entertainment-Education Soap Opera Based on Formative Evaluation Research Summative Evaluation Research: Testing Hypotheses and Measuring the Effects of Entertainment-Education Soap Operas in Mexico Building upon Mexico's Experience with Entertainment-Education Soap Operas, Summary and Conclusions References Index

Economic Transformation: The Mexican Way

Mexico offers a particularly interesting study of economic reform because of its successes and its ambitious scale. As that country's current Minister of Finance and Public Credit and a distinguished economist, Pedro Aspe offers an informed, inside look at attempts to modernize Mexico's economy through the 1970s and 1980s. Aspe examines how Mexico has tried to stabilize its economy with measures such as economic deregulation, fiscal reform, privatization of state-owned enterprises, and realistic budget management. He argues that these changes have had not only profound economic effects, but social and political ones as well.Aspe first discusses Mexico's experience with macroeconomic stabilization, emphasizing its social and political aspects, and noting the successes already achieved in terms of stabilization, production, and employment. In the extended analysis of the Mexican economy that follows, he focuses on the structural impact of state reform on the external sector, and on the efficiency and distributional impacts of fiscal reform. Such macroeconomic adjustments, Aspe points out, have resulted in the gradual replacement of the state in its role as leader of Mexico's economic development by the participation of an entire society - an achievement that is the result of the orderly negotiation and consensus of workers, farmers, entrepreneurs, and government.Aspe concludes with a summary of the way in which all of these changes have brought about the profound transformation of Mexico's economy.