- Claudio Loser, and Eliot Kalter
- Published Date:
- February 1992
In recent years, Mexico has made a major transformation in its economic structure and a significant improvement in its financial performance. In response, inflation has fallen markedly, output and employment have risen substantially, and financial savings have soared. Furthermore, the balance of payments has become stronger. This is in response to the restructuring of public sector external debt and a sharp increase in private inflows, including capital repatriation and direct investment, which helped finance private sector activity and increase net international reserves.
Mexico’s experience, which many have followed with great interest, was not the result of a rapid policy fix but the consequence of a persistent, courageous, and difficult process of adjustment that started at the beginning of the 1980s and was intensified in subsequent years. The process of adjustment and adaptation was without set-backs. Policy initiatives were taken that proved insufficient to achieve the authorities’ objectives; crucial structural reforms were implemented only later in the decade; policies taken in response to changing external conditions sometimes took time to be adopted; considerable costs in terms of the required adjustment were expended to regain the credibility of government policies. In the end, the policy stance of the Mexican authorities, while involving risks, has paid off, and the country is now poised to enter a new phase of sustained economic growth and financial stability.
The observed success of Mexico has to be attributed first and foremost to the efforts of the Mexican authorities and support of the Mexican people, who, in the end, were the true protagonists in this process. Mexico was not alone in its efforts, however. Government policies were facilitated by the support of the multilateral financial institutions (including the International Monetary Fund), the governments of creditor countries and their agencies, and commercial banks. The process of cooperation was sometimes difficult, but adequate solutions were found to address the sometimes conflicting demands of Mexico and its creditors.
Central to Mexico’s achievements has been the pursuit of strong financial policies, particularly in the fiscal and credit areas. Burdened by high levels of domestic and foreign debt, the authorities took measures as early as 1983 to strengthen the primary balance of the public sector. These were later reinforced by a broad-based tax reform and a process of reform and privatization of a significant number of public sector enterprises. The eventual improvement of the overall public finances helped the authorities implement a strong monetary and credit policy, based on simplified and transparent rules, and with market-based determination of interest rates.
Exchange rate policy has evolved considerably in recent years, as it sought to strike an appropriate balance between strengthening the external sector and providing an anti-inflationary nominal anchor. The authorities have been successful in this strategy in the context of prudent financial policies and the general agreements reached on prices and wages among the public sector, labor unions, and the private sector. In the process, the peso appreciated in real terms at a time when the balance of payments strengthened, helped by a process of external and internal liberalization and reform that the authorities pursued. This process of reform led to lower financing costs and major improvements in productivity and allowed for a sustained increase in non-oil exports. In the end, however, it was the tight rein on macroeconomic policy that helped reduce existing imbalances and provided a strong basis for a return of private sector confidence.
The strengtheing of the overall balance of payments in recent years has been accompanied by a dramatic change in its structure. The external current account, which initially was associated closely with the improvement of public finances, has recently reflected large movements in private capital. There are risks arising from the resulting growing current account deficit, but with the strong fiscal effort the private sector has used foreign savings—in part in the form of returning Mexican savings held abroad—to finance investment under clear rules and with no government guarantees on commercial or exchange rate risk. Furthermore, the progress made in reducing Mexico’s external public debt burden has reduced these risks.
Questions may be raised about the availability to Mexico of external resources in a period of global saving scarcity; about an observed decline in measured private savings; and about possible additional required changes in Mexico’s economic structure. It is clear, however, that today Mexico is much better positioned to deepen its process of integration into the world economy, helped by improved economic management, modern economic institutions, and a lean public sector. It is hoped that the material presented in this paper will be helpful in illustrating the lesson’s emerging from Mexico’s path toward sustained growth and lower inflation.
The IMF has been associated closely with the process of adjustment carried out in Mexico over the last decade. The association has been reflected in the extended arrangement of 1982–85, the stand-by arrangement of 1986–88, and most recently the extended arrangement that was approved in 1989 and extended through early 1993. The various papers in this volume have been prepared by staff members who participated in the process of cooperation between Mexico and the Fund over the last five years. This volume does not seek to present a complete description of policies and developments, but rather reviews in detail some central aspects of the Mexican experience of recent years. Included are discussions on macroeconomic policies; an analysis of the evolution of structural reforms in key areas, such as in the financial system, trade, and foreign investment; and the changing nature of external private market financing from concerted lending to debt reduction and the re-emergence of voluntary lending. The dynamics of inflation, the balance of payments, and certain other key variables are also discussed.
Section II deals with the main developments in the Mexican economy over the last decade. It presents an overview of policies, particularly in the last four years, and provides a setting for the discussions of other sections. In explaining Mexico’s recent success, it stresses the importance in achieving sustainable economic growth of financial policies; incomes policy; structural reforms; external financial support; and measures to protect the economy from adverse shocks.
Section III reviews the interrelationship among fiscal, monetary, and exchange rate policies during the period since the late 1970s. The section explores the links between the implementation of macroeconomic policies, private sector expectations, and the performance of the economy. It notes that with the low confidence about government policies that existed during much of the 1980s, the turnaround in private sector expectations—critical to the eventual success of the Mexican program—required considerably tighter policies than otherwise would have been the case.
Section IV analyzes the process of international trade and foreign investment policy reform, as a mechanism for integration of Mexico in the world economy. It describes Mexico’s policies in these areas prior to 1983 and the transformation to an open economy. It also reviews the recent trade initiatives to consolidate earlier gains, including the North American Trade Agreement and arrangements with Latin American countries.
Section V reviews the program of domestic financial liberalization and reform. These reforms, which started in the mid-1980s and had a notable effect on financial performance, involved a market-oriented approach to the determination of interest rates, as well as major structural changes, including the re-privatization of the commercial banks that had been expropriated in 1982. The section also reviews the changes in the rules governing other financial intermediaries and the importance of these changes for Mexico’s competitiveness in attracting financial saving.
Section VI deals with Mexico’s external debt policies. It focuses on the evolution of the authorities’ approach to commercial bank debt restructuring since the 1982 debt crisis. The section discusses the key elements of the approach, their implementation, and their relationship with the “international debt strategy.” It focuses in particular on the movement away from liquidity support in the form of repeated principal reschedulings and concerted new money loans, and toward comprehensive debt stock operations. Together with the sustained implementation of appropriate economic policies, these operations have contributed to Mexico’s return to voluntary international capital market financing.
Section VII supplements the previous chapter by discussing Mexico’s return to voluntary capital markets—a trend that started in 1989 and has intensified markedly with respect to both the magnitude of funds mobilized and the range of Mexican borrowers. The section also reviews the evolving structure of the instruments that were used to obtain foreign financing by both the private and public sectors, and some reasons behind the success in returning to voluntary financing.
Section VIII analyzes the dynamics of Mexican inflation over the period 1988–91. While the section does not seek to test any specific theory about inflation, the results show a clear response of domestic inflation to adjustments in public sector prices, to external price and exchange rate movements, as well as to credit policy, but less to wages. In turn, it is shown that nominal wages are associated with movements in minimum wages, while monetary expansion is shown to adjust endogenously in light of the existing exchange rate policy. The section concludes that no simple and unique model can explain inflation in Mexico but suggests the importance of policy imbalances in explaining prices, wages, and monetary developments.