Aaron Tornell, Frank Westerman and Lorenza Martinez look at Mexico's less-than-wonderful economic performance since 1990. Their theory is that Mexico has not had enough neoliberal reform. Too little has been done to clean up the financial sector, and make the financial market work.
I think that they are right: successful resolution of the credit crunch and financial problems produced by the Tequila Crisis of 1994-1995 would have enabled Mexico to grow much faster. But are they realistic? To demand that everything go right in order for a reform program to succeed and benefit an economy is to set a very high bar indeed.
Was there another strategy of development open to Mexico in 1990 that would have been more fault-tolerant than the neoliberal strategy that was adopted? I'm asking: this is a serious question, not a place where I know the answers.
Posted by DeLong at April 13, 2004 11:35 AM | TrackBack | | Other weblogs commenting on this postAaron Tornell, Frank Westermann, and Lorenza Martinez (2004), "NAFTA and Mexico's Less-Than-Stellar Performance" (Cambridge: NBER Working Paper No. w10289): Mexico, a prominent liberalizer, failed to attain stellar gross domestic product (GDP) growth in the 1990s, and since 2001 its GDP and exports have stagnated. In this paper we argue that the lack of spectacular growth in Mexico cannot be blamed on either the North American Free Trade Agreement (NAFTA) or the other reforms that were implemented, but on the lack of further judicial and structural reform after 1995. In fact, the benefits of liberalization can be seen in the extraordinary growth of exports and foreign domestic investment (FDI). The key to the Mexican puzzle lies in Mexico's response to crisis: a deterioration in contract enforceability and an increase in nonperforming loans. As a result, the credit crunch in Mexico has been far deeper and far more protracted than in the typical developing country. The credit crunch has hit the nontradables sector especially hard and has generated bottlenecks, which have blocked growth in the tradables sector and have contributed to the recent fall in exports.
Off topic, ignore this post:
Speaking of doing everything right, what's the received wisdom about what happened to Argentina? Didn't they follow the rules, monetarily and economically? (I don't know, I just believe everything I read and that's the impression I got) - If so, why did things fall apart there?
Of course, if the US government wants to reduce its long position on the stock market, it could always eliminate capital gains taxes.
Posted by: Keith on April 13, 2004 12:38 PMWhy don't they try and emulate the SUCCESSFUL development stories such as Taiwan, China, India, which have never accepted the neoliberal agenda, have maintained strict capital controls, and maintain heavy state intervention and planning in the economy. Or even emulate the western powers which do the same. Neoliberalism is a prescription for the weak...
Posted by: noam chimpsky on April 13, 2004 01:50 PMAnswering narrowly, there were certainly alternative ways of doing financial-sector reform. The NBER paper, like a lot of the neoclassical lit on Mexico, treats "financial liberalization" naively -- it's pretty clear what liberalized trade looks like, but far from clear what liberalized finance looks like, and in the Mexican case in 1989-1992 the answer was an oligopolistic banking system with large rents built in from anticipated growth in consumer lending. The aim was not to increase credit to businesses small or large, and that was not the result. Plus juxtaposition of this sort of liberalization with a peg had various harmful consequences.
More broadly, I've argued elsewhere (JEI September 2002) that something larger was going on during this period, in which the very nature of the state and its relations to the private sector were in question. You have to step back a little bit farther than the "development path" question and ask who or what would be doing the policy-setting. Salinas-era growth was still state-driven, but not via state spending.
Posted by: Colin Danby on April 13, 2004 02:02 PMYou're just begging for some curse words from Daniel Davies, you know.
Posted by: Jason McCullough on April 13, 2004 02:45 PMYou know, some of us in Latin America have experienced now TWO waves of "free market", neoliberal reforms and both ended in currency collapses and giant debt crises. The "we didn't go far enough" argument sound tired and irritating besides its strange similarity with old communist argumentation. Frankly, ¿what would have to happen for neoliberal economists to admit that they are wrong? Right now I would guess that we are on the double digits of examples of "market reforms failing in Latin America" and the answer is more of the same medicine?
Posted by: Carlos on April 13, 2004 03:29 PM"...a deterioration in contract enforceability and an increase in nonperforming loans."
As if these two were not related, as if they were not a function of an incestuously oligopolistic organization of the business elite/state structure? But where else would investment in the domestic, non-tradeables sector come from, if the official policy was to pusue "export-led growth"? Perhaps one of the problems with neo-classical economic theory is that it pursues theoretically the calculus of individuals rather than the actual calculations of "individuals" and the socio-structural conditions in which they occur.
Posted by: john c. halasz on April 13, 2004 03:36 PMWell put by Colin Danby. The PRI's liberalization policies do call into question "the very nature of the state and its relations to the private sector." How to figure this back into what should have been done makes for tough work.
Posted by: david on April 13, 2004 07:47 PMI think this is also an important point that Colin Danby makes:
-- it's pretty clear what liberalized trade looks like, but far from clear what liberalized finance looks like...
What does it look like? Anyone know? This also is a serious question. My personal prejudice from reading about NAFTA and other trade agreements is that they are as much about poorly designed international big business investment insurance schemes, and consolidation of internatinal and national financial institutions, either of which may not result in anyting "liberal" at all. But I don't really know, it is my prejudice and semi-poorly formed opinion. Anyone know out there?
Posted by: jml on April 13, 2004 08:08 PMI downloaded this article and began to read it and right away it contrasts Mexico to a typical MIC, without previously defining this acronym.
What is a MIC?
Posted by: Genevieve Signoret on April 14, 2004 10:04 AMI think I figured out what MICs are: Middle Income Countries. HICs are High Income Countries.
My clue? Aaron Tornell lists in his bibliography another article of his called “Credit Market Imperfections in Middle Income Countries.”
Posted by: Genevieve Signoret on April 14, 2004 11:27 AMOnline Casino Directory
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