Causes of Mexican Poverty

Introduction

Mexico had taken a risk in the 1970s by borrowing heavily in world capital markets and indulging in overexpansive policies, and then paid dearly when oil prices fell and world interest rates rose. Adjustment to the new circumstances required a policy that would increase net exports, generating foreign exchange to service the external debt. Because the government, not the private sector, owed most of the external debt, fiscal policy also had to change in order to increase revenues and cut non-interest expenditures (Raymond, 35-45). The restoration of growth required changes that would build confidence and encourage private capital inflows by means other than commercial bank loans, which were no longer available. Finally, to make the economy more flexible and competitive in a global context, the rules that governed the flow of goods and investment had to change.

In mid- 1982 Mexico was in a deep economic crisis. The international environment was adverse to a Mexico saddled with foreign debt. World interest rates were high, the price of oil, Mexico's main export, was falling, and commercial banks had stopped lending. This unfavourable international environment exacerbated the consequences of domestic imbalances and contributed to rampant inflation, capital flight, and chaos in the financial and foreign exchange markets. To confront the internal imbalances and accommodate the adverse external conditions, Mexico was compelled to adjust its expenditures, reorient its output, and find new ways to foster growth.

In the early 1990s Mexico gained recognition as a country successfully managing economic adjustment and reform. Inflation slowed, flight capital was returning, domestic and foreign investment was rising, and per capita output began to grow. The path to recovery, however, had been far from smooth. Well into the late 1980s, analysts wondered why Mexico's recovery was so slow despite the sound macroeconomic policies and structural reforms it had instituted. The slow recovery imposed high social costs on the Mexican population, as per capita real disposable income fell on average by 5 percent a year between 1983 and 1988.

For some six years the Mexican government focused economic policy on restoring stability, particularly on lowering the rate of inflation and keeping the loss of international reserves in check. It finally succeeded in 1988, when inflation decreased from monthly averages close to 10 percent at the beginning of the year to about 1 percent by year's end. The real circumstances of poverty in Mexico are much harsher and more severe than normal life. A real poor or extremely poor person in Mexico is only struggling to survive every day. (Raymond, 16-26)

Poverty

The consensus view on the underlying cause of the 1982 crisis held that runaway inflation and balance-of-payments disequilibrium resulted from a large fiscal deficit and the misalignment of relative prices, in particular the exchange rate. Falling oil prices and higher world interest rates had triggered the crisis but lay beyond the control of policymakers. Capital flight was reviewed as a consequence of bad domestic policy rather than as a cause of the crisis. The government expected that, once ...