From the mid 1950's to the early 1970's, Mexico was a financially stable country with high growth and relatively low inflation. The sharp increase in oil prices in 1973-4 generated significant additional export revenues for the Mexican government from the state owned oil industry. Moreover, the recycling of Middle East petrodollars through European banks greatly increased the availability of international capital. Under these new conditions the Mexican government adopted expansionary policies that created large fiscal deficits and generated large capital inflows and an overvalued currency. In addition, Mexico retained restrictive trade policies that limited import and export growth.
By the early 1980's the Mexican economy was vulnerable to changing conditions and perceptions in international capital markets. Such changes were soon in coming: rising world interest rates and falling oil prices prompted a capital market revaluation of Mexico. This revaluation quickly turned into a run from Mexico and a significant economic crisis. In August 1982 the Mexican government announced that it could not meet scheduled debt payments.
Throughout the rest of the 1980's the Mexican economy struggled under its crushing debt burden. Per capita GDP growth from 1981 to 1988 was -2% per year. Government spending on health and education fell under the fiscal pressure. A grim but evident effect was increased hardship and worsening future prospects for poor children. In 1990 the Brady Plan recognized the need to reduce interest and principal payments for Mexico and other developing countries. The focus shifted to market-oriented reforms. Mexico cut government spending while refocusing on social needs, reformed the tax system, privatized state enterprises, and liberalized trade.
Under economic policy of strict fiscal restraint, a pegged exchange rate, and a strong anti-inflationary commitment, the Mexican economy began to grow again in the early 1990's. Exports boomed while imports grew even faster. International capital returned to Mexico with surprising speed. In contrast to the flows of commercial bank lending in the early 1980's, much of the capital inflow in the 1990's consisted of portfolio investment, a very volatile form of capital. Unfortunately, under policies much different from those in the late 1970's and early 1980's, in December 1994 the Mexican economy again confronted a major crisis.
Mexican Economic Crisis