Mexican Economy

On December 20, 1994, in an attempt to make Mexican products more competitive, Mexican President, Ernesto Zedillo Ponce de Len, devalued the Mexican Peso. Unfortunately, attempts at keeping the Peso to only a fifteen percent devaluation failed. The Peso dropped almost forty percent (Roberts, 1). It went from 3.5 to almost 7.5 peso’s to the dollar before it stabilized. The devaluation not only sent shockwaves through the Mexican economy, but through the rest of the world. Why should the world now risk it’s money to save Mexico? Why not just let the Mexican economy and government collapse?

To calm these shock waves United States President Bill Clinton, acting on his executive order, organized an approximately $49.5 billion aid package ($20B U.S., $17.5B International Monetary Fund, $10B BIS, $1B Consortium

of Latin American countries, $1B Canada) to Mexico (Department of State Dispatch, 78). This move could make globalization a friend or a foe in Mexico’s case. Friend, because it opens opportunities for foreign countries

and companies to further expand their economies and influence. Foe, because one country’s economic problems is the world’s economic headache. Unfortunately, it seems that the latter prevails.

The Mexican government is broke, citizens unhappy, rebels are itchy, and opposition leaders are gaining influence. All these are ingredients to a bad situation getting worse--without money or influence, the Mexican government is bound to be overrun.

Mexico over the past few years has gone from a totally corrupt and controlling government to a more democratic, privatized, and deregulated government. This has opened Mexico up to greater economical prosperity. Everything from government run factories to banks have been sold to foreign and Mexican investors, willing to pay high premiums for these assets.

With the threat of rebels in the south or the Institutional Revolutionary Party (PRI) possibly overthrowing the government, the rewards that foreign investors were about to reap from the large scale Mexican privatization

were quickly fading, hence the devaluation of the Peso in 1982. Who wants to invest in Mexican institutions if the government no longer has the power to protect them and insure their prosperity?

The socialist party managed to take control of the government and nationalized everything in sight, costing investors billions of dollars in lost property (Roberts, 3). Investors were facing the gloomy possibility of losing billions, even trillions of dollars to nationalization. Mexican stocks, debt, and currency would be rendered worthless.

If a socialistic government were to take control of Mexico, then every other rebel group and socialist party in Latin America would now seize this opportunity and throw their own rebellions--possibly erupting a situation

in Latin America where not only the moneys, but the militaries of the world would be needed to once again bring stabilization to this region of the world. This would give new meaning to the words: foreign direct investment. Instead of using money to stabilize and grow underdeveloped economies, the world would be using blood.

With the globalization of products follows the globalization of stocks, foreign debt, and currency: where one country’s stocks, bonds, and currency are traded in another country’s market. This was the case with Mexican securities. Many Mexican stocks were traded on foreign exchanges, debt was financed with foreign loans, and currency was changing hands all over the world.

The December 20th devaluation of the Peso sent the Bolsa (Mexican Stock Market) plummeting--but things didn’t just stop there. Upon opening, other markets began to plummet also. Mexican stocks (i.e. Telephonos de MMexico, Grupo Televiso, Grupo Simek, etc.) traded on foreign stock exchanges began to drag the exchanges lower. Investors fearing that the peso’s devaluation will not only affect Mexican stocks, but the stocks of foreign companies doing business there, began withdrawing billions of dollars out of these stocks (Lane, 16.)

Not only did the stock markets suffer, but the debt markets also began plummeting, especially in emerging markets such as Argentina, Brazil, Chile, and etc. Investors wary that the situation in Mexico could also spread

to these other developing countries, were no longer willing to except the risk of financing these countries at current interest rates. They were demanding higher interest, and sent the debt of these developing countries

spiraling downward. Yields were reaching levels of thirty percent or more, making it almost impossible for these countries to further finance their development, thereby almost bringing development to a standstill (Lane,