Stabilization and growth recovery in Mexico : lessons and dilemmas

Before 1988,"orthodox"policies (fiscal discipline and tight money) failed to bring inflation down and induce a sustained economic recovery. The Mexican stabilization plan announced in December 1987 (the Pact) shows that the right combination of orthodox and"heterodox"policies (for example, income policies) can meet, and has met, both objectives. The author shows that although many orthodox adjustments began before the Pact, considerable further adjusting was needed before it could succeed. To make the stabilization credible required significantly tighter fiscal policy and a lengthening of the maturities of domestic debt between 1988 and 1990. A key factor behind high real interest rates during the recent Mexican stabilization plan was the initially low credibility of the fixed - and later the preannounced - exchange rate. While it is difficult to assess what establishes credibility, we can hypothesize about the factors that may hamper it. Crucial among them is the consistency of the macroeconomic policy framework, where fiscal policy plays a key role. Domestic debt management also matters as the probability of a successful run on the peso increases with the amount of government liabilities that could, in a given period, be exchanged for foreign reserves. In the short term, Mexico may not have other options than further tightening its fiscal and monetary policies. Over the medium term, however, a real peso depreciation appears necessary.Economic Theory&Research,Environmental Economics&Policies,Economic Stabilization,Strategic Debt Management,Banks&Banking Reform

Private saving in Mexico, 1980-90

Between 1987 and 1990, Mexico's current account and trade balance deteriorated by more than US$10 billion. Higher investment accounts only partly for this deterioration; nor can it be attributed to the public sector. By conventional (unadjusted) measures of private saving - the total investment not financed by public or foreign savings - private saving did decline sharply between 1987 and 1990. But that diagnosis does not hold true when private, public, and foreign savings are corrected (as they are here) to account for shifts in portfolio composition from foreign to domestic assets, for the effects of inflation on foreign and domestic interest income (the inflation tax), for fluctuations in the real exchange rate, and for other factors. Arrau and Oks provide information about the components of private saving by asking questions such as these: Is consumption more important than disposable income in explaining changes in private saving? What components of consumption and disposable income matter most? The following are among the conclusions: When conventional measures of private saving are corrected, the recent decline in private saving appears less important than it did before. Most variations in private saving between 1980 and 1990 are ascribable to fluctuations in disposable income. The sharp drop in private saving in 1990 was prompted primarily by a decline in disposable income and, less so, by fast-growing consumption.Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Financial Economics,International Terrorism&Counterterrorism

NAFTA, capital mobility, and Mexico's financial system

Typically the impact of the North American Free Trade Agreement (NAFTA) is analyzed from a macroeconomic perspective, to examine the implications for capital market flows or for the aggregate degree of financial integration. This analysis often involves examining whether certain conditions of arbitrage or efficiency tend to hold, given greater integration of financial markets. Alternatively, other work examines only the effects of greater financial integration for the efficiency with which financial services are provided microeconomically. The two approaches are rarely combined, nor are the effects of integration considered within such a combined framework. The authors combine the two approaches to examine how NAFTA will affect capital flows and the efficiency with which financial services are provided in Mexico. They also call attention to domestic financial systems and monetary and exchange rate policy issues that Mexico must address if greater financial integration is not to result in increased risk for the domestic financial system or greater macroeconomic instability.Payment Systems&Infrastructure,Banks&Banking Reform,Financial Intermediation,Economic Theory&Research,International Terrorism&Counterterrorism,Macroeconomic Management,Banks&Banking Reform,Financial Intermediation,Economic Theory&Research,Environmental Economics&Policies

Mexico after the debt crisis : is growth sustainable?

The story of Mexico's involvement in international capital markets is one of riches to rags and back to riches again. Four periods can be distinguished: stable, steady international borrowing through the 1950s and 1960s; heavy reliance on international loans through commercial bank syndicates from the mid-1970s until 1982; massive capital flight, zero access to private lenders, and complete reliance on official sources from 1982 to 1990; and massive return of flight capital, a continued drought in syndicated loans, but heavy expansion of foreign direct investment, portfolio investment, and bond placement. Easing the transition from the third to the fourth period was the restructuring of Mexico's external debt under the Brady deal, which ultimately reduced - and smoothened - the net transfer to foreign creditors. The authors argue that smoothening the external transfer had far more impact on the domestic economy than the reduction of debt and debt servicing per se. The financing of the expansion that ensued in the fourth period differs dramatically from what was observed earlier in Mexico's history. Foreign capital inflows were dominated by foreign direct investment and especially portfolio investment and, unlike in the second period, most inflows financed the domestic private sector. Are the current rate and pattern of borrowing - at levels unforeseen at the time of the Brady deal - a cause for concern? Is growth sustainable? To answer these questions, the authors analyze the domestic macroeconomic counterpart of the large capital inflows and high current account deficits of the early 1990s. Whether growth is sustainable depends on the level of domestic saving. But even if domestic saving increases, the transition to sustainable growth is unlikely to be smooth because the slowdown in consumption growth (associated with improved saving) is likely to be contractionary. The outcome depends on how investment and net exports respond. The authors analyze cyclical and structural factors of investment and the external sector, and their interactions with Mexico's exchange rate and monetary policy, to interpret the recession in the second half of 1993. They emerge from their analysis with cautious optimism about Mexico's medium-term prospects.Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Macroeconomic Management,Financial Intermediation

Portfolio effects of debt-equity swaps and debt exchanges with some applications to Latin America

Voluntary debt reduction schemes (VDR), such as debt-equity swaps (DES) or collateralized debt conversions (CDC), are bound to play a relevant role in the foreign debt strategy of highly indebted countries (HICs). This paper assesses the impact of VDR on domestic macroeconomic variables. More specifically, it evaluates the impact of DES and CDC on inflation, equity prices and on sovereign debt prices. For that purpose a short-term portfolio balance model with domestic and foreign assets/liabilities is formulated. A distinctive feature of the model is that all current transactions take place at end of period prices. The model supports the view that DES are inflationary, and indicates that in the short-term, DES and CDC are likely to raise equity prices and sovereign debt prices. This paper shows that the impact of DES on sovereign debt prices depends on a host of factors: the expected trade surplus; the stocks of debt and foreign-held equity; the redemption price of debt; restrictions on profit remittances; the physical rate of return on equity; and the technology that determines it. A discussion regarding the dynamics of adjustment to the steady state illustrates possible linkages between DES subsidies, rates of return and investment levels. The paper concludes with a parametrization of the conditions under which DES can lead to higher debt prices in selected Latin American countries.Economic Theory&Research,Environmental Economics&Policies,Financial Intermediation,Banks&Banking Reform,Public Sector Economics&Finance

Capital flows to Central and Eastern Europe and the Former Soviet Union

The capital flows to Central and Eastern Europe and the Former Soviet Union (CEE/FSU) represent a relatively small, albeit growing share of capital flows to developing countries. Taking all flows together, the total net flows to these 25 countries (Albania, Armenia, Azerbaijan, Belarus, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, Macedonia, Moldova, Poland, Romania, Russia, Slovakia, Slovenia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan) were about $44 billion in 1996 or about 1/8 of aggregate net flows to all developing countries. These countries accounted, however, for about 20 and 22 percent respectively of all developing countries Gross Domestic Product (GDP) and exports in 1996. As a fraction of their GDP, total inflows were consequently smaller than for many other developing countries, and averaged about 5.4 percent over the 1990-96 periods. In more recent years, there has been a more rapid inflow of private capital, as reform efforts have consolidated and economic prospects improved and, for some countries, as European Union (EU) integration became a possibility for the near future. For some countries, short-term capital has recently become an important source of external financing. Since most countries have been late comers to the phenomenon of large private capital inflows, they have not experienced much of the overheating phenomena which have affected other developing countries in the past (Latin America) and recently (East Asia). The paper is organized as follows. Section IIbriefly describes the facts on capital flows to these countries. Section III discusses important links and relationships between macroeconomic variables and the capital flows, including some of the basic motivations, and causes for capital flows. Section IV describes and analyzes the policy framework and policy responses in those countries that received the bulk of capital flows. Econometric tests are presented in section V, while section VI discusses the issues which may be arising with capital flows in these countries in the future and provides some conclusions.Capital Markets and Capital Flows,Banks&Banking Reform,International Terrorism&Counterterrorism,Fiscal&Monetary Policy,Economic Theory&Research,Capital Flows,Banks&Banking Reform,Macroeconomic Management,Economic Theory&Research,Settlement of Investment Disputes

Interest rates, growth, and external debt : the macroeconomic impact of Mexico's Brady deal

Interest rates fell sharply after Mexico's Brady deal, and private investment and growth recovered. The authors show that the main benefit of debt relief was not to lower expected payments but to reduce uncertainty. Reduced uncertainty was found to be the dominant factor in explaining the positive macroeconomic response (largely because of its favorable effect on exchange rate crises). Econometrically, they find that the variability of the future net transfer had a significant impact but the average of the future net transfer itself did not. Their results confirm that debt reduction has a positive macroeconomic effect, but reject the debt overhang hypothesis (the benefits to growth of a reduced tax burden) as the dominant factor. Their main conclusion: debt reduction can have a much greater impact than the magnitude of relief, coupled with standard growth models, would suggest. The secondary effects on private investment of reduced uncertainty about government policy is likely to be more important than the direct amount of debt reduction itself. But private investment is unlikely to increase if uncertainty remains about future domestic macroeconomic stability and reform. The debt package would not have succeeded if the government had not put through a successful domestic reform program before the debt relief package.Environmental Economics&Policies,Public Sector Economics&Finance,Strategic Debt Management,Economic Theory&Research,Banks&Banking Reform

Inverse cascades and resonant triads in rotating and stratified turbulence

Kraichnan’s seminal ideas on inverse cascades yielded new tools to study common phenomena in geophysical turbulent flows. In the atmosphere and the oceans, rotation and stratification result in a flow that can be approximated as two-dimensional at very large scales but which requires considering three-dimensional effects to fully describe turbulent transport processes and non-linear phenomena. Motions can thus be classified into two classes: fast modes consisting of inertia-gravity waves and slow quasi-geostrophic modes for which the Coriolis force and horizontal pressure gradients are close to balance. In this paper, we review previous results on the strength of the inverse cascade in rotating and stratified flows and then present new results on the effect of varying the strength of rotation and stratification (measured by the inverse Prandtl ratio N/f, of the Coriolis frequency to the Brunt-Väisäla frequency) on the amplitude of the waves and on the flow quasi-geostrophic behavior. We show that the inverse cascade is more efficient in the range of N/f for which resonant triads do not exist, /2≤N/f≤21/2≤N/f≤2. We then use the spatio-temporal spectrum to show that in this range slow modes dominate the dynamics, while the strength of the waves (and their relevance in the flow dynamics) is weaker.Fil: Oks, D.. Universidad de Buenos Aires. Facultad de Ciencias Exactas y Naturales. Departamento de Física; ArgentinaFil: Mininni, Pablo Daniel. Consejo Nacional de Investigaciones Científicas y Técnicas. Oficina de Coordinación Administrativa Ciudad Universitaria. Instituto de Física de Buenos Aires. Universidad de Buenos Aires. Facultad de Ciencias Exactas y Naturales. Instituto de Física de Buenos Aires; ArgentinaFil: Marino, R.. Universite Lyon 2; FranciaFil: Pouquet, A.. State University of Colorado Boulder; Estados Unido

El ahorro privado en México, 1980-1990

Entre 1987 y 1990 la balanza comercial y de la cuenta corriente de México se deterioró en más de 10 000 millones de dólares. El grado en que este deterioro debe preocuparnos se basa, por supuesto, en los factores subyacentes. Si ocurrió por un alza en la inversión no debe ser causa de consternación, pues el deterioro comercial podría considerarse entonces como algo temporal. Los indicios muestran, de hecho, que a pesar de las serias reducciones en la inversión pública, se ha dado un crecimiento considerable en la inversión fija en los últimos tres años, en particular en 1990, cuando la inversión fija creció 13.5% en términos reales en comparación con su nivel de 1989, o 28% por encima de su nivel de 1987. No obstante, la mayor inversión sólo explica en parte el reciente deterioro de la cuenta corriente. Este deterioro no se puede imputar al sector público; el ahorro público se elevó en un grado mayor que el incremento en la inversión privada, lo que implica que la totalidad del deterioro de la cuenta corriente podría atribuirse a la baja en el ahorro privado. La medida convencional del ahorro privado cayó de hecho de manera notable entre 1987 y 1990. Sin embargo, cuando se miden adecuadamente el ahorro privado, público y extranjero, este diagnóstico ya no sigue siendo válido.