Emerging market failure: The case of Mexico

This dissertation identifies a case of “emerging market failure,” represented by the Mexican financial crisis of 1994/95. The hypothesis is that the financial crisis that occurred during the 1990s in Mexico is linked to the one that took place during the 1980s, and that both financial crises are manifestations of a single phenomenon. The two financial crises are strung together by a thread that involves freely-flowing international capital and an economy that is strongly reliant on the international capital market. This study finds that the principal explanation for both crises is located in the interaction of the following: the fundamentals of the Mexican economy that does not generate domestic savings and relies upon the international financial market; a political system that concentrates power at the expense of the democratic political process; and the governmental policies that pursue goals in the short-run at the expense of long-term outcomes.; In the years since the 1994/95 financial crisis, the international financial system has displayed seemingly contradictory characteristics. In the advanced economies, equity values have been rising to unprecedented levels. Mechanisms for risk management have become increasingly efficient and are being employed on a large scale. Yet for many developing economies, the latter half of the 1990s has been characterized by currency speculation, devaluation, investment capital reversals, and IMF bailouts. This has led some in the academic and policy-making spheres to suggest that individual governments have lost their ability to guide their economies and that there are inescapable forces in a globalized world economy that can destroy even an economy that has followed a sound economic policy path. This dissertation takes an in-depth look at the Mexican case in order to explore this issue. The findings of the study permit a re-framing of the issue of financial crises. It moves beyond the short-term policies and outcomes that occurred in the context of 1994/95, and explores economic policy paths and the fundamentals of the economy and the political system, in the context of evolution in the international economy.