Cues From Mexico's Tumble
THERE is a lot to learn about what went wrong with the Mexican economy - about how a country that, according to most analysts, did so much right for so long could fall so quickly into financial crisis, and about why virtually no one forecast the speed and magnitude of the crash.
Four important lessons have already emerged.
The first: Don't throw the baby out with the bathwater. Mexico's crisis cannot be blamed either on its economic strategy of the past decade or on the North American Free Trade Agreement. Both were oversold, and this may have produced complacency among investors and government officials. But no strategy or trade pact can be made foolproof against bad decisionmaking - and plainly (in hindsight) the Mexican authorities made a series of awful decisions in 1994.
For understandable although hardly justifiable reasons, Mexico's economic managers failed to correct its course - by devaluing an inflated peso and restraining domestic credit - when it could have been done at a far lower cost than the country will now end up paying. Instead, they let the dangers mount until confidence in the economy was undermined; this, in turn, triggered the financial crisis. (This all becomes clearer in retrospect.)
The point, however, is that NAFTA and Mexico's economic reform program are not the culprits, but actually should make recovery easier and quicker.
Second, more of a good thing is not always better. Because the amounts can be so great and the stakes so high, external capital flows have to be carefully monitored and managed, and used with restraint.
Starved for foreign capital throughout the 1980s, the Mexican government saw the soaring inflows of the early 1990s as validation of its economic policies, and seemed intent on sustaining them at higher levels, regardless of cost or risk. But these external flows did not address the difficulties confronting the Mexican economy - its puny rate of domestic savings, a growing current-account deficit, and an overvalued currency.
Mexico postponed dealing with these basic problems until the crisis finally exploded. Foreign capital is needed, but so are moderation and discipline in attracting and using it.
The third lesson is that countries should wash their economic linen in public. Mexico kept some of its key economic statistics - such as the level of foreign reserves - hidden. Had the numbers been public, the policy errors might have been remedied sooner, and the crisis averted. For the same reasons, international agencies such as the World Bank and International Monetary Fund ought to increase timely public access to their information and analysis on specific countries. Not all World Bank and IMF transactions can be revealed, but many more of them could be.
One last point: The chances are slim that the rescue effort mobilized by the US to stem the Mexican crisis (which provides some $50 billion in loans and loan guarantees to Mexico) will be repeated anytime soon for any other country. The opposition to helping Mexico was far too fierce to expect the US to try to assist elsewhere. The international financial institutions, although helpful, lack sufficient capital, and the other major industrial countries showed little interest in the rescue.
That is just one more reason for the governments of other emerging-market economies to understand what went wrong in Mexico and to make the hard choices needed to avoid falling into the same financial trap. The Opinion/Essay Page welcomes manuscripts. Authors of articles we accept will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts by mail to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHEL.CSPS.COM.