Mexico Economic Crisis

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This reading examines the various reasons why the economic reforms implemented after the economic crisis of 1982-1985, and which resulted in the establishment of NAFTA in 1994, in Mexico did not result in higher economic growth (Journal of Economic Literature, 2010). Theoretically privatization of government firms, and the opening of the economy to trade and foreign investment, should have produced a growth in the Mexican economy. However, this was not experienced as the growth remained stagnant and even China, which opened itself right after Mexico without any reforms, developed a much rapid growth (Journal of Economic Literature, 2010). In fact, while Mexico’s trade and inward FDI shares of its GDP were like those of China, real GDP per working-age person increased 510% in China compared to only 10% in Mexico (Journal of Economic Literature, 2010). …show more content…
Inefficient financial systems, insufficient rule of law, and a rigid labor market all contributed to the disappointing growth (Journal of Economic Literature, 2010). For example, inefficient financial institutions can lead to the misallocation of labor and capital, which in turn lead to low TFP (Journal of Economic Literature, 2010). Furthermore, inefficient bankruptcy can also cause a low TFP by preventing the entry of efficient firms and keeping inefficient ones alive (Journal of Economic Literature, 2010). It is interesting to note that although China also has these same issues, its growth it is not affected by them as China is not as economically developed as Mexico and as China develops these factors will start affecting it (Journal of Economic Literature, 2010). Without reforms, its growth is doomed to slow down just as it has in the Latin American

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