The Mexican Peso Crisis

Essay by fender16University, Bachelor'sB+, February 2009

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The Mexican financial crisis of 1994 caused shockwaves that traveled the globe over with significant effects on neighboring countries and key trading partners. Mexico was experiencing the positive effects of a bounce back since its last crisis in 1982 and very few would have predicted the depth of the plunge that would take place in the Tequila crisis of 94'. There is no single source that brought Mexico to its knees in 94', rather exchange rate complications, coupled with other poorly planned economic and trade policy mistakes.

I think that in order to better understand the crisis of 94' we must go back a little ways in Mexico's history to examine the issues as they developed. In 1982 Mexico had suffered from a sever debt crisis that launched Mexico into a depression that was similar in magnitude of the great depression of 1929. The depression caused Mexico to reexamine their protectionist trade and economic policies.

Mexico would look to attract foreign investment by deregulating industry and privatizing government controlled sectors. Foreign investment was believed to be the key ingredient for success in emerging countries during the 80's. Moving away from a strong protectionist policy and tight government controls would mean a massive reorganization of Mexican business and government. The state would no longer be the principle source of investment in industry in Mexico, it would move from financing approximately one half of gross fixed capital in 1982 to less than one quarter in 1994 (Ramirez). Foreign direct investment grew from 8 billion dollars in 1982 to 52 billion dollars in1994 (Graham & Wada). Foreign investment was a catalyst for economic growth during these years and may have helped contribute to the massive expansion of credit from $193 million in 1988 to $23.2 billion in 1993 (Sachs, Tornell, and Velasco). The...