FINANCIAL CRISES AND ECONOMIC MODERNIZATION:
THE MEXICAN EXPERIENCE

Abel Beltran-del-Rio

After two decades, 1955-75, of high growth with internal (price) and external stability, the Mexican economy entered a turbulent period in the mid-seventies, which now seems to have ended by the mid-nineties, opening the prospect that a period of high growth with stability has returned. Behind this change is a comprehensive and continuos economic reform, built gradually through trial-and- error, for more than a decade and as a response to the recurring turbulence. The systemic turbulence, each time, started with a devaluation followed by a financial and an economic crisis - a paralysis of payments and credit flows followed by a recession cum inflation. These repeated episodes of stop-and-go happened after the devaluations of 1976,1982,1987 and 1994. Though the worst was the one of 1982, and the one that sparked the economic reform, we will focus on the most recent, which led to the additional reform of the exchange rate regime and, in contrast with the previous ones, had a prompt and apparently lasting recovery.

In 1994-95 Mexico exhibited all the "pre-and-post" symptoms of a national financial crisis (of the variety common in our global times), detonated by the abrupt devaluation in the last days of 1994. Then, it received a huge foreign financial transfusion led by the US and subject to the IMF emergency medication; it endured the deep recession of 1995, and still is experiencing the economic, social and political after-effects. Despite the trauma of devaluation and ensuing difficulties, the surprisingly quick and strengthening GDP recovery of 1996-97 can be explained mainly by the advanced stage, by the end of 1994, of the modernization of its economy - one of whose next steps, in 1995, ironically was going to be the orderly transition to a more market determined exchange rate and the discontinuation of its extended use as a key anti-inflationary "anchor."

This economic reconstruction, traceable to 1983, developed into a full-fledged economic reform by 1985, accelerated in the 1990's (with Nafta as one of its pillars), and still continues today. lts comprehensiveness was in response to the recurrent currency and financial crises suffered by Mexico since 1976. The most traumatic and stagflationary one, in 1982, led to the search for a full economic overhaul. Mexico set as its goals to minimize overdependence on oil exports, government disavings, external debt, price controls, and the "presidential economy" - susceptibility to the arbitrary will of one man, often at the end of his term.

The other main explanation of the V recovery is the new readiness of the Mexican authorities to play by the emerging global rules, a change in mentality and evidence of the continuation of the reform. A third, special, explanatory factor is the border with the US, two thousand miles long - considered a menace in Mexico in the 19 century, now turned into a promise at the end of the 20^th.

The device to avoid a return of instability due to presidential surprises is the advance of the political reform, the other side of modernization. The democratic process that was evident in the legislative elections of 1997 shows the commitment of the present administration to provide more economic certainty, via the political modernization.

GRAPH 0
MEXICO: REAL GROWTH
(ANNUAL % CHANGE IN GDP)

ALEMAN

MATEOS

ECHEVERRIA

MADRID

ZEDILLO

AVILA

CORTINEZ

ORDAZ

LOPEZ

SALINAS