BPEA | 1994 No. 1

Mexico: Stabilization, Reform, and No Growth

Alejandro Werner and
headshot of Alejandro Werner
Alejandro Werner Director - Georgetown Americas Institute, Nonresident senior fellow - Peterson Institute
Rudiger Dornbusch
discussants: Guillermo Calvo and
Guillermo Calvo Profesor, Universidad de Columbia; ex economista jefe, Banco Interamericano de Desarrollo
Stanley Fischer
Stanley Fischer Vice Chairman of the Board of Governors of the Federal Reserve System

1994, No. 1

IN THE SECOND HALF of the 1980s, after strenuous efforts, Mexico was
coming to be viewed as a showcase of successful stabilization and economic
reform, institutional stability, and financial predictability. Mexico
was becoming what Chile already had become and what all of Latin
America hoped to be. But the Chiapas uprising, the assassination of
presidential candidate Luis Donaldo Colosio, the ensuing muddle about
his succession, and the sheer fact of an election year have raised doubts
about Mexico’s ability to achieve lasting stability. By April 1994, the
sharp upturn in interest rates, arising from speculative attacks on the
peso, suggested that a far too optimistic view may have been taken of
Mexico’s future. The Mexican economy had come to a virtual standstill.
Per capita income is now far below what it was in 1980, as shown in figure
1, and from 1992 to 1993 it fell by 1.2 percent. Moreover, any positive
growth that may occur, in 1994, will have been fueled by fiscal expansion
not by strength in the real economy.
This paper argues that Mexico suffers from a failure to accompany
the stabilization of inflation, shown in figure 2, and the impressive array
of economic reforms with not only true political reform but also true economic
progress. The stabilization strategy has led to an overvaluation of
the exchange rate, a precarious financial situation, and a lack of growth.
Real interest rates paid by firms continue to be very high, nonperforming
loans have been increasing, and the current account deficit stands at
more than $20 billion.