Introduction
In 1994, granting autonomy to the Bank of Mexico was seen as an ideal solution. However, subsequent periods have been challenging for the nation’s economy. Critics, including Francisco Suárez Dávila, have even accused Mexico of repeating the “Development Stabilization” period (1954-1970) but instead falling into the “Stabilization Stagnation” phase.
Two Explanations for Post-Autonomy Growth Slowdown
Without attempting to refute such an important critic, I propose two explanations for the subsequent periods of low growth following autonomy in 1994. First, from a technical standpoint, price stability achieved under autonomy status is only an indispensable yet insufficient precondition for rapid and self-sustaining development. Second, since then, Mexico’s economy has been hit by powerful negative external shocks.
External Shocks
In 1994, a series of political shocks hit Mexico, leading to significant devaluation and a global contagion effect dubbed the “Tequila Effect.” The social and economic costs were immense.
During Ernesto Zedillo’s administration, as Mexico undertook a difficult and slow adjustment and recovery effort, harmful “runs” against the Mexican economy occurred. These runs took place towards the end of 1995, mid-1996, and even into fall 1997.
A more forceful external shock was felt in 2008 due to the massive financial crisis originating on Wall Street. The consequences were devastating, impacting Mexico’s financial system and its exchange rate regime.
In 2022, the entire world was affected by the COVID-19 pandemic. In Mexico, this manifested as numerous human losses and an 8% contraction in the national economy.
Relevance of the Bank of Mexico
The Bank of Mexico, established in 1925 and granted autonomy in 1994, plays a crucial role in maintaining price stability and fostering sustainable economic growth. As Mexico’s central bank, it is responsible for implementing monetary policy and ensuring financial stability.
Agustín Carstens served as the Governor of the Bank of Mexico from 2007 to 2016, during which he navigated the country through various economic challenges. His expertise and steady hand were instrumental in maintaining Mexico’s financial stability amidst global turbulence.
Impact of External Shocks on Mexico’s Economy
Throughout history, Mexico has faced numerous external shocks that have significantly impacted its economy. These events have tested the resilience of the Mexican financial system and the Bank of Mexico’s ability to maintain stability.
- 1994 Political Shocks: Led to devaluation and the “Tequila Effect,” causing immense social and economic costs.
- 1995-1997 Capital Flight: Harmful “runs” against the Mexican economy, exacerbating the challenges of adjustment and recovery.
- 2008 Global Financial Crisis: Devastating consequences for Mexico’s financial system and exchange rate regime.
- 2022 COVID-19 Pandemic: Severe human losses and an 8% contraction in the national economy.
Conclusion
Mexico’s economy has faced significant challenges due to powerful external shocks since the Bank of Mexico was granted autonomy in 1994. These events have tested the resilience of Mexico’s financial system and the Bank’s capacity to maintain stability. Despite these obstacles, the Bank of Mexico has remained a vital institution in promoting sustainable economic growth and price stability.
