Mexican Peso Crisis: Irregularities of Deregulation

Mexican Peso Crisis: Irregularities of Deregulation

It is one thing to liberate an economy or a market; it is another to lift all regulations on such market. Economic liberalization should be done in an appropriate, intelligent manner. The lack of proper regulation can lead to a snowballing effect where a seemingly trivial matter can lead up to a terrible outcome. This was the case of Mexico in 1994 where birth was given to the “Tequila Effect”. What were the conditions in the country that gave way to this crisis? Could the crisis have been avoided? Perhaps under a more strictly regulated economy Mexico’s financial crisis could have been prevented, and if not, it could have been toned down in severity. The government’s decision to liberalize the country intended well, but was poorly engineered and therefore became an uncontrollable Leviathan that took its toll on the country as a whole.

Leading up to 1994 Mexico seemed to be miraculously rising from its crippled past of inflation and instability, to become a shinning beacon for the rest of Latin America. It was the example to be followed and the cause for much excitement among the players in the financial markets. This phenomenon was known as the “Mexican miracle” and had been led by President Carlos Salinas de Gortari; a firm believer in neo-liberalization policies, and also the man who tackled inflation through a rigid fiscal and monetary policy, while strongly holding the exchange rate pegged at an average of 3.1 pesos to the dollar[1]. The new conditions of the Mexican economy were looked upon favorably by potential investment, and the stability it provided at home was very popular among the domestic population.

[1] Froot, K and Mathew McBrady, “The 1994-95 Mexic...

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...r different conditions, regulation might be the most inadequate of strategies. Most everything in this life is relative; this question proves not to be the exception. Attempting to grasp the whole all at once is a task too difficult to tackle, so it is wise to focus on the part. Mexico’s case has been so readily studied because it is so helpful in learning more about the whole. The complex dance that the macroeconomic variables performed ensued a crescendo, which climaxed with capital flight. Perhaps there is still more to be learned from Mexico’s experience. Hopefully the experience, which resulted in the strife, hunger and shock felt by so many Mexicans, will serve as a stepping-stone in the pursuit for greater economic understanding. In the end the real question at hand is, will the lessons learned today still apply tomorrow? I guess we will have to wait and see.