Kessler shows how political considerations distorted the liberalization process in Mexico, leading to inconsistent and unsustainable patterns of financial policy. Although market reform is promoted in developing countries to improve economic efficiency and stimulate growth, in Mexico financial liberalization provided rent-seeking opportunities for privileged groups and increased the states' ability to finance politically inspired obligations.||The research examines four periods: the populist administrations of Echeverr'a and Lopez Portillo, during which the foundations of modern financial mark
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This article traces the ways in which political, economic, domestic, and international factors converged to provoke a massive financial crisis in Mexico in 1994/5, as well as its consequences for future reform efforts. The author argues that the ruling PRI party and international investors were equally adamant in defending the anchored exchange rate. However, in attempting to appease both domestic and foreign interests, the Salinas administration lost control of the macroeconomic fundamentals. While the combination of a massive multilateral loan and the shift to a floating exchange rate paved the way for Mexico's rapid economic recovery, a main legacy of the crisis was the political demise of the PRI. (Rev Econ Pol/DÜI)
Market reform is advocated in developing countries to improve economic efficiency and prevent privileged groups from obtaining rents from the policy-making process. Yet this prescription fails to address the complex political process that governments are likely to confront when moving toward the market. This study shows how political considerations during President Salinas's administration distorted economic reform in Mexico.During the 1990s Mexican finance policy contradicted the government's declared neoliberal principles. While the banks were reprivatized and deregulated, they were also given a high degree of protection from competition, enabling the new owners to charge excessive interest rates. In addition, the government artificially inflated the value of the currency through exchange-rate intervention. These contradictory policies are best understood as a coherent political response to the electoral vulnerability of the ruling party (PRl) at the end of the 1980s. When viable political opposition threatened the PRl's ability to maintain power, it responded by using financial policies to distribute economic benefits to social groups, particularly business, the middle class, and the poor, whose support was critical for electoral victory.