NCPA - National Center for Policy Analysis

The Mexican Peso and Emigration

February 7, 2003

Mexican emigration has been a boon for the United States, says Mary Anastasia O'Grady, but an enormous loss for Mexico, breaking up families and stripping the country of human capital. Equally damaging has been reckless monetary mismanagement since the mid-1970s that has discouraged much needed financial capital formation.

Ever since the 1994 peso crisis, which ended in a collapse of a 3-1 fixed exchange rate with the dollar, Mexico's central bank has been wedded to a "floating" exchange rate. The weakness of the floating peso is affecting Mexico's economy today.

  • Less than a year ago, it took nine Mexican pesos to buy a dollar; but by yesterday afternoon, the cost of a greenback was up to almost 11.
  • The net effect of this is that wage earners in Mexico have suffered a big pay cut in dollar terms; but historically Mexico has discouraged wage increases in order to limit generally rising prices after peso devaluation.
  • The result invariably has been a loss in Mexican purchasing power, a widening of the wage gap between the United States and Mexico and more northern migration.

Bank of Mexico President Guillermo Ortiz has said that he would use all tools available to stabilize the peso, suggesting that beyond draining liquidity through higher reserve requirements, he would consider using international reserves to take pesos out of circulation.

Allowing private investment in energy, improving protections of property rights and liberalizing labor laws would make Mexico more attractive for capital. So will a peso with a stable exchange value.

Source: Mary Anastasia O'Grady, "Mexico's Debate Over Shoring Up the Peso," The Americas, Wall Street Journal, February 7, 2003.

 

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