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  Mexico's Economic Struggles

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Traders work on the floor of the Bolsa de Valores, the Mexican stock market. (AP)

By Aileen S. Yoo
Washingtonpost.com Staff
Updated August 1998

Mexico's economy boomed after World War II, growing about 3 to 4 percent (accompanied by 3 percent inflation) until the 1960s. Growth slowed the next decade when fiscal mismanagement, combined with high debt and an overvalued peso, forced a currency devaluation in 1980.

Falling into a recession, the Mexican economy remained stagnant throughout most of the 1980s. In 1988, President Carlos Salinas de Gortari enacted reforms to remove trade barriers, encourage foreign investment and reduce inflation.

Mexico seemed well on its way to economic stability. The country joined the United States and Canada in the North American Free Trade Agreement, which will phase out all tariffs over a 15-year period. But a series of political and social troubles threatened the country's economic prospects.

Fearing that NAFTA would hurt the local economy, peasant rebels in Chiapas state revolted on New Year's Day 1994, the day the trade pact was enacted. Later, the leading presidential candidate of the ruling Institutional Revolutionary Party (PRI) and the secretary general were assassinated. The country's shaky political situation made investors skittish.

Meanwhile, the country's large trade deficit and atrophying foreign currency reserves (which meant the government was running out of funds to prop up the peso) forced newly elected President Ernesto Zedillo to devalue the peso. The move, meant to stem the high debt and soaring trade deficit, sent investors running and thrust the country into its worst recession in 60 years.

The Washington Post reported in 1995 that 30,000 businesses went bankrupt, 2 million people were unemployed, interest rates soared to 140 percent, inflation hit 52 percent, and the economy shrank more than 6 percent.

Washington feared that the economic troubles of its third-largest trading partner would trickle over the border and to the rest of the world. As a result, the United States led an international bailout program that included $20 billion from the U.S. and over $40 billion from international lenders. The bailout helped Mexico rebuild its reserves and reduce its debt.

Another lifesaver was exports, particularly the maquiladora industry — foreign-owned factories in Mexico that get duty-free raw materials used to make goods solely for export. By 1995, rock-bottom labor costs lured manufacturers back to Mexico. Foreign exports increased by 30 percent, which experts say saved the country's economy.

"Exports have been absolutely critical to the Mexican economy – they've kept it afloat," said Don Michie, a professor of marketing at the University of Texas at El Paso.

Mexico staged a remarkable economic recovery: The country paid off its $13.5 billion loan to the United States more than three years ahead of schedule and reported economic growth of 7 percent in 1997.

© Copyright 1998 The Washington Post Company

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