Bailing Out Mexico Doesn't Help
October 10, 1995
Four times during the last 20 years the United States has responded to currency crises in Mexico by lending it increasing amounts of money. In the 1995 bailout, the United States extended up to $20 billion in loans as part of a $50 billion rescue package.
Although the circumstances that led up to each financial crisis differed, the underlying cause has always been bad monetary policy. The Mexican central bank attempts to expand the money supply to keep interest rates from rising sharply while maintaining the Mexican peso at a fixed or pegged exchange rate. As a result, capital flows out of the country and the government is unable to make payments on its debt.
U.S. assistance, instead of encouraging monetary reforms and requiring U.S. banks and wealthy Mexican investors to renegotiate or write off their government debt, rewarded bad policies. The victims of the crisis are the Mexican people, who are suffering economic hardships with no prospect for change.
- Unemployment increased by more than one million from the end of 1994 through mid-1995, reaching 6.6 percent, more than double its level a year ago and the highest since statistics started to be collected in 1983.
- Real wages are now 60 percent below 1980 levels.
- The consumer price level was 35 percent higher in June 1995 than a year earlier.
- Real Gross Domestic Product, the value of goods and services produced by the economy, will shrink by at least 3 percent by the end of 1995.
- The government hiked the national value-added tax from 10 percent to 15 percent in April 1995.
The standard of living of the Mexican people can only be raised by policies that encourage market forces, such as a truly independent central bank.
Source: W. Lee Hoskins and James W. Coons, "Mexico: Policy Failure, Moral Hazard and Market Solutions," Policy Analysis No. 243, October 10, 1995, Cato Institute, 1000 Massachusetts Avenue, NW, Washington, DC 20001, (202) 842-0200.
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