The Mexican Economy in the 1990s: Boom or Bust?

Robert C. Shelburne, United Nations Economic Commission for Europe

Abstract

This chapter discusses the Mexican economy before and after the creation of NAFTA with an emphasis on how its macro-economy and its trade accounts, especially the structure of U.S.-Mexican trade, responded to both the implementation of NAFTA and the currency collapse that followed. In anticipation of NAFTA, the Mexican economy attracted significant capital inflows and returned to economic growth after years of stagnation. During the first year after implementation in 1994, bilateral trade between Mexico and the United States increased significantly. At the end of 1994, Mexico experienced an exchange rate crisis due to massive capital outflows; as a result, the peso depreciated by 40 percent and a serious recession followed. Mexican imports collapsed while their exports increased dramatically. This currency crisis was due to speculative capital flows and a risky economic strategy by the Mexican government in the years prior to the crisis. Also, once non-economic developments altered investor sentiments, the government failed to react appropriately. Mexico's recovery from crisis and future prospects are discussed.