During the early 1990s, the Mexican economy appeared to be healthy. This was a positive sign because the economy had experienced some challenges which included the “lost decade” of the 1980s. This "lost decade" comprised of the 1982 debt crisis and the 1986 collapse of oil prices both of which negatively impacted the economy.
Furthermore, inflation was reduced considerably; foreign investors had increased funds invested, and the central bank had billions of dollars in reserves. Additionally, there were serious talks on reducing trade barriers with the United States. This was done through NAFTA; otherwise known as the North American Free Trade Agreement, which was implemented at the start of 1994. Nevertheless, less than twelve months after …show more content…
This approach allowed the government to organize a series of policies and regulations. The aim of these policies/regulations was to protect domestic industries from international competition. What followed was high import tariff barriers, non-tariff barriers on imports of foreign goods, and support for Mexican industries. A consequence of these barriers/supports was that producers in Mexican had no motivation to export manufacturing. The reason was a captive domestic market with little competition. This relaxed environment had created a curtailment in the foreign exchange market, which was intended to fund imported capital equipment/intermediate goods. It also endangered external debt service of the government, by causing a damaged exchange rate crisis. There were several developments on the other side of the border that factored into the crisis. For example, in 1979-1981 the Federal Reserve Board in the U.s boosted interest rates to record levels. This raise was intended to combat inflation in the United States. European central banks had also increased rates during this period. During this period there was also an accelerated decline in commodity prices. These events had led to the deterioration in export receipts, an increase in the cost of servicing debts denominated in foreign currencies, and tensions on the exchange rate. This got so bad that in August 1982 the …show more content…
The government had raised interest rates which resulted in consumers/businesses who had borrowed funds to default on their loans. Banks had to be bailed out and reformed. The government passed laws that allowed foreign investors to own/operate a majority share of commercial banks. The effects of this crisis than began to spread to other emerging markets. The U.S government worried that this could spread even further had provided/organized a large standby loan for Mexico. The loan was made up of $20 billion from the U.S. Treasury, the $18 billion from the IMF, $10 billion from the Bank for International Settlements, and $3 billion from private banks for a total of $50 billion. In summary, this loan had saved the Mexican economy. The government had used about $13 billion of the loan to stabilize the markets and banks, built up reserves, allowed the government to change policies and repaid the U.S government ahead of