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POLITICS IN MEXICO

POLITICS IN MEXICO. LUIS ESTRADA lmestrad@weber.ucsd.edu Spring quarter 2005. Stabilization and Structural Change (Aspe 1991). Stabilization: First phase, control inflation, exchange rate Structural Change: Open the economy, get rid of inefficient SOEs

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POLITICS IN MEXICO

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  1. POLITICS IN MEXICO LUIS ESTRADA lmestrad@weber.ucsd.edu Spring quarter 2005

  2. Stabilization and Structural Change (Aspe 1991) • Stabilization: First phase, control inflation, exchange rate • Structural Change: Open the economy, get rid of inefficient SOEs • Shared goal: Sustained economic growth with price stability

  3. Stabilization and Structural Change (Aspe 1991) • Mexican “miracle” (1950-1970): GDP grew 6.6 %; inflation below 4.5 % per year • Huge investment in infrastructure, active land distribution, and industrialization • Backed by strict fiscal and monetary policies

  4. Stabilization and Structural Change (Aspe 1991) • Monopolies did not have incentives to grow in employment or productivity (captive markets) • Two alternatives in the 1970s: to become export-oriented (as Southeast Asian countries) or keep replacing private investment with public spending… • Despite preliminary evidence of failure, oil discovery kept the hope alive of continue the external borrowing

  5. Stabilization and Structural Change (Aspe 1991) • Solution: Solve the inflation problem not only from the monetary view, but also from the expectations view • Experiences of Brazil and Argentina failed (went too quick after controlling inflation) • Pact for Economic Solidarity (PSE) / Pact for Stability and Economic Growth (PECE) in December 1987 with representatives of the labor, farming, and business sectors + government

  6. Stabilization and Structural Change (Aspe 1991) • Permanent (monitored) commitment to start reducing inflation • Govt. promised to control its finances (sell SOEs and reduce the size of the administration) • Restrict credit expansion • Longer term contracts that included anticipated inflation • Trade liberalization

  7. Stabilization and Structural Change (Aspe 1991) • Reduction in income tax from 50 to 35%; VAT from 15 to 10% (lower rates, broader tax base, less evasion) • 80 percent of 1,115 SOEs that existed in 1982 were sold • Started selling small ones, then the big ones • Accumulated success; ending of inefficient subsidies

  8. Stabilization and Structural Change (Aspe 1991) • Renegotiation of foreign debt (supported by success in the local economy), and ‘technocratic’ connections • Less uncertainty brought better financial instruments (longer ‘maturity’) that eased financing the economy • Re-privatization of commercial banks • Potential free-trade agreement with the U.S.

  9. Stabilization and Structural Change (Aspe 1991) • Results: Inflation dropped from 159% (1987) to 18% (1991); today is 4% • From 1988 to 1991 GDP grew positively, ranging from 1.3 to 4.4%; today is around 4% • International reserves in 1991 were $16 billion USD; today over $60 billion USD (highest in history)

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