Can Mexico weather its next election cycle? Mexico has suffered a financial crisis toward the end of three of the last four presidential terms. Problems during election years have become so common that people are naturally anxious about the potential for a crisis during next year's presidential election -- despite government claims that things will be different this time.

Why do financial crises occur in election years? A convergence of forces makes the Mexican economy vulnerable to crisis.

• Incumbent governments in Mexico, like those in many other countries, have incentives to keep the economy growing in an election year to attract as many votes as possible.

• The more rapid the growth, the better voters feel and the more likely they are to vote for the incumbent party.

• Consequently, going into an election year, the government has tried to sustain or increase fiscal spending; and monetary policy was kept loose, while the pace of lending to the public and private sectors was maintained.

Mexico's current situation appears better than in past pre-election years. Since the 1994-95 election year crisis, however, several key factors have changed, suggesting that economic turbulence is less likely now than in the past. These factors include: a floating exchange rate, which can limit real exchange rate overvaluation; better debt management; a weak banking sector, which is unlikely to be a source of rapid credit expansion; and greater political competition.

Source: David M. Gould "Can Mexico Weather It Next Election Cycle?" Southwest Economy Issue 6 November/December 1999, Federal Reserve Bank of Dallas, 2200 North Pearl Street, Dallas, Texas 75201.