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Show The Post-Nafta Mexican Peso Crisis: Bailout or Aid? Isolationism or Globalization? Brett M. Humphrey to save the falling peso, and protect the United States from a future crisis of its own. The legislative branch on the other hand was of a different mentality. The historic election of 1994 had just been held and the newly elected, "Contract-with-America" rookie Republicans felt more attached to their constituencies, than to Mexico and the new dependent relationship created under NAFTA. They believed they were elected to reduce government spending, not to send billions of U.S. dollars to a foreign state. As Clinton tried to go ahead with his proposed plan of support, Congress did everything within its realm to make sure U.S. dollars would not be sent to Mexico. As both sides became more and more entrenched in their ideological stance, the first of what would prove to be many showdowns between the new Republican-controlled Congress and President Clinton began. The rest of this essay is divided into five sections. First comes a discussion of the background of the peso crisis and of the degree of interdependency between Mexico and the United States. The second part concentrates on the actors involved in the early stages of the United States' reaction to the Mexican peso crisis, through a discussion of the dialogue between the executive and legislative branches. Third is a discussion of the deepening of the executive/legislative struggle in America over what should be done. Then the Clinton Administration's turning to another approach is explained. Lastly, some conclusions are drawn. The essay is intended to contribute to better understanding of America's new form of economic interdependence, and varying ideological views concerning it, as well as an understanding of the balance of power between the executive and legislative branches of government. Background: The Development of the Crisis The Mexican Economy Mexico, like most countries, has constantly been trying to develop and increase its economic base. Mexican leaders looked at globalization as a key to their continued attempt to improve economically. Specifically they believed that through foreign investment and other ties to first-world countries, Mexico would receive a trickle-down benefit from its relationship with these first-world countries, especially its neighbor the United States. They expected that as companies from the first-world invested in Mexico, and established production plants and various other operations, some of the money, technology and most importantly jobs would be of benefit to Mexico, and thereby allow Mexico to develop more quickly than previously anticipated. Carlos Salinas de Gotari (1988-1994) based his presidency on this notion and due in large part to this policy, he enjoyed a good-standing relationship with the United States' various presidential administrations. Highlighting the success of this policy choice is the fact that, before 1988 when Salinas came to office, close to 100% of all of the foreign direct investment (FDI) in Mexico was tied to Mexico's oil reserves. But as of 1988 (see Chart One below) there began to be new investments into other areas of the economy. Mexico in the process of emerging from the trauma of a debt crisis accepted these investments openly. More importantly, this new form of income allowed Mexico to build up an extensive source of international reserves. However, Nora Lustig of the Brookings Institution suggests, Mexico's perceived economic success was not a positive indicator of its real state of affairs. "Mexico became a victim of its own success," for the Mexican economy grew too dependent on these new investments (Lustig 1998,156). This dependency created two major problems, from which the crisis seemed to stem. First, with the new foreign direct investment, the trade balance began to switch from a surplus to a deficit (see Chart Two below). Mexico's governmental leaders felt the country had no choice but to finance this new deficit with more capital inflows, creating the second problem. By financing a deficit with further capital inflows Mexico was only compounding its situation of indebtedness and dependency. The problems leading up to the Mexican peso crisis may seem complicated; however, a parallel can be noted to the American consumer. When a consumer has too many bills and not enough money the consumer may choose to pay the bills with a credit card. Unfortunately, the consumer is thereby not actually reducing his/her debt, but merely deferring it and generating a new bill. Equally unfortunate for Mexico, the same held true. With this new dependency on capital inflows came vulnerability to any exogenous "shocks" that affected the pace of capital inflows. If these inflows slowed down the large account deficit would no longer be able to be financed, and the Mexican economy would be forced to endure a sudden and major adjustment (Lustig 1988, 157) Despite Mexico's vulnerability to swings in these capital inflows, the government's policy to contest inflation with its exchange rate commitment had held inflation to single digits, and produced an overall public-sector surplus since the middle of the 1980s. Also under Salinas, Mexico's economic experts felt they had enacted comprehensive economic reforms necessary for rapid increases in productivity, that would lead eventually to increases in exports growth and employment. This belief was reinforced by the increase in domestic and foreign direct investment (FDI) that had taken place over the last few years, and the new opportunities secured for exports by the signing of the NAFTA and other trade agreements (OECD 1996, 21-23). Thus, even though Mexico's economists realized the foreign investors on whom it was so dependent would flee, if Mexico were forced to make a drastic devaluation, they felt that the strong, stable peso was the central ingredient to ensuring the future success of the Mexican economy. This was the state of affairs leading into the Mexican Presidential election year of 1994. As the election continued to draw near, the vulnerability of the Mexican economy increasingly pointed towards the upcoming trouble. But President Salinas and his successor, Ernesto Zedillo Ponce de 34 |
