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Mexico and the IMF in the 1990s. Old and New Issues on Capital Account Liberalization and Emerging Market Countries

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Abstract

The 2007–2008 financial crisis has once again prompted a lively debate on the benefits and risks of capital account liberalization in emerging market countries. This paper contributes to this debate by looking back at the 1990s through the lenses of the International Monetary Fund (IMF). On the basis of archival research, the paper argues that the IMF looked at Mexico as evidence of the benefits of global financial integration both before and after the 1994 crisis, focusing on macroeconomic conditions and underestimating the soundness of the domestic financial sector. In the conclusions, the paper links the findings with the debate that followed the subprime crisis.

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Notes

  1. For instance, Brazil imposed a 2% tax on foreign purchases of equities and bonds in October 2009. Peru signalled it might have limited foreign exchange exposure of its banks as part of an effort to reduce currency volatility.

  2. In what follows, I exclusively focus on the reforms adopted to achieve international financial liberalization, bracketing those reforms aiming at achieving trade liberalization.

  3. Smith and Chandler (1995).

  4. IMF Archives. SM/95/164 (1995a, pp. 8, 10).

  5. IMF Archives. SM/95/164 (1995a, pp. 7–9, 17).

  6. IMF Archives. SM/95/164, Sup. 1 (1995b, p. 7–9; p. 17).

  7. IMF Archives. SM/94/202 (1994, p. 20).

  8. Ibid., p. 25.

  9. IMF Archives. SM/95/164 (1995a, p. 3–4).

  10. IMF Archives. SM/95/164, Sup. 1 (1995b, p. 11).

  11. IMF Archives. SM/95/164 (1995a, p. 3–4).

  12. IMF Archives. SM/95/164, Sup. 1 (1995b, p. 21–23).

  13. The following sections draw on the research conducted in Moschella, 2010.

  14. Before the devaluation, the peso–dollar exchange rate was allowed to fluctuate within a band consisting of a fixed lower limit (on the peso appreciation) and an upper limit that increased by MexN$0.0004 a day.

  15. If not otherwise specified, economic data used in this section are drawn from the International Capital Market Report (August 1995), Chapter II (p. 2–11) and background papers II and III (p. 53–78).

  16. Deputy Attorney General Mario Ruiz Massieu resigned denouncing the government for an attempt to block the investigations on the assassination of his brother, Ruiz Massieu.

  17. Note should be taken that capital flight was not led by foreign investors. Domestic investors were the first to send their funds abroad, offering ‘a useful remainder that with increasingly liberalized and integrated capital markets, domestic investors also have the potential to initiate a crisis’ (Goldstein and Calvo, 1996).

  18. The Mexican crisis, indeed, sparked a debate about the reforms to the international financial architecture and, in particular, to the workings of the international financial institutions. See, for instance, G7, Ministers of the Group of Seven.

  19. In the 1995 International Capital Market Report, however, IMF staff conceded that the Mexican crisis did not fully fit with the speculative attack hypothesis because of two factors. First, reserve losses were not depleted as a reflection of expansionary policies. Second, the real exchange rate appreciation was not an immediate problem. Even in the presence of such ‘variations’ from the standard speculative attack model, the staff nonetheless pointed to weak fundamentals to explain the currency attack on the peso (IMF, 1995a, pp. 70, 74).

  20. Indeed, in line with the IMF's financial orthodoxy, Argentina avoided recourse to capital controls on capital outflows but tightened its fiscal policy, cutting government expenditure. It also privatized provincial banks and provided liquidity support for the banking system. Also, IMF Archives. SM/97/32 Supplement 1 (1997b, p. 34).

  21. IMF Archives. SM/97/32 Supplement 1 (1997b, p. 34).

  22. IMF Archives. SM/97/32 Supplement 1 (1997b, p. 37, emphasis mine).

  23. IMF Archives. SM/97/32 (1997a, pp. 37–40).

  24. IMF Archives. SM/99/60 (1999, p. 6).

  25. IMF Archives. SM/98/187 (1998, p. 49).

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  1. Department of Sociology and Social Research, University of Trento, Via Verdi, 2638100, Trento, Italy

    Manuela Moschella

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Moschella, M. Mexico and the IMF in the 1990s. Old and New Issues on Capital Account Liberalization and Emerging Market Countries. Comp Econ Stud 52, 589–609 (2010). https://doi.org/10.1057/ces.2010.18

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