The fiscal calamity that occurred in Mexico during the 1980 ‘s posed an model episode in the history of World recession. A authoritative instance of debt crisis was introduced in this period that took Mexico into a lost decennary but it besides served valuable lessons about placing factors and events taking to such debt crisis and in revising fiscal basicss and policies to hedge these factors.

In 1960 ‘s to 70 ‘s, Mexico was in the stage of rapid growing and extended productiveness chiefly due to natural resource mobilisation. However, growing started to falter in early 1970 ‘s chiefly as a reactivity of foremost increased protectionism, restrictive policies that weakened the fiscal system and secondly increased authorities disbursement and unsystematic growing of public endeavors that caused gradual diminution in financial subject and increased dependence on foreign adoption. Further, external inflationary force per unit area was constructing up due to the oil dazes which were curbed by raising the dollar involvement rate that created a grave job in developing states to serve their debt duties.

The crisis commenced on August 12, 1982 when the governments of Mexico officially announced it was non able to run into its duty to serve an $ 80 billion debt which was largely dollar dominated. This paper analyses the factors that were responsible for the happening of Mexico ‘s debt crisis in the 1980 ‘s in the subsequent subdivisions. The first subdivision investigates internal events that weakened the fiscal sector of Mexico chiefly due to deteriorating fiscal subject and a history of developing fiscal system. Following subdivision trades with external events such as oil dazes and increased foreign adoption that lead to the lost decennary of Mexico in the 1880ss. The concluding subdivision comprises of the oncoming of the crisis and the redresss opted to resuscitate from it. Last, the decision summarizes the kernel of this paper.

Factors responsible for Mexican Debt Crisis in 1980 ‘s

There are strings of events that preceded the debt crisis around the 1880ss which can be studied in two aspects: Internal facets and External facets. Internal aspects chiefly study macroeconomic instability and weak fiscal subject that were prevailing in Mexico and how it made its economic system vulnerable to debt crisis. On the other manus, External aspects focal points on how planetary events happening at that stage affected Mexico ‘s ability to serve its debts. The undermentioned subdivisions purposes to supply a image on how internal failings coupled with unfavourable outwardnesss led Mexico to fiscal obscureness.

Internal factors that facilitated Debt Crisis of 1980 ‘s

Macroeconomic Instability

The mean GDP growing rate of Mexico in the 1960 ‘s was about 6.5 % exhibiting rapid developments in productiveness and resource allotment as seen in Table 1.. The economic system was basically inward oriented and it mostly practiced import permutation industrialisation ( ISI ) scheme bespeaking high trade barriers and selective preferential recognition strategies ( World Bank, 1998 ) . This protected system helped in pulling private investings but by 1970 this scheme could non prolong due to turning economic deformations.

Table 1. Mexico: Growth of Gross Domestic Product 1950-1997

( Average rate of compounded one-year growing in per centum )

Time period


GDP per capita
















Beginning: INEGI 1995

In table 1, Mexico ‘s GDP growing is 6 per cent in mean boulder clay late 1970 ‘s because of sound resource allotment and populating criterion coupled with protective ordinances. However, by 1980 ‘s there is a drastic decrease in GDP growing to nominal 1.81 per cent and a negative downswing in GDP per capita growing. This slack was signaled prior to the crisis when macroeconomic indexs started to demo wary consequences listed in the points below ( World Bank, 1998 ) :

As ISI scheme was discarded, the private sector was authorized to take in puting but it was non to the full equipped to put to death its intermediating function. This caused misallocation of nest eggs in undertakings and investing in low return assets in the cost of puting in advanced ventures which finally lowered the economic growing.

Such misallocation of resources was amplified with influx of foreign capital and besides extended plus retentions in foreign currency chiefly dollars, augmented fiscal system ‘s exposure.

These deformations led to increase in domestic rising prices and the existent involvement rates besides turned negative. Consequently, there was increased capital flight which reduced the parts of financess that were loanable to domestic investors.

The above points mean the oncoming of macroeconomic instability in Mexico during 1970-1980 when it lowered its guards towards the extroverted crisis. Had the domestic fiscal mediators and system as a whole been suitably regulated against misallocation and avoided greater disposition towards foreign urges so Mexico could hold had a stronger standing at least in fiscal context.

Restrictive FDI policies in early 80 ‘s

The authorities adopted and operated under restrictive jurisprudence to advance Mexican investing and modulate FDI in 1973. This jurisprudence created uncertainness between foreign investors since there was widespread discretional power with the policymakers. The side-effect of such weak foreign investing system was that capital influxs made its manner chiefly through autonomous bank loaning to which Mexico had grown to be mostly dependent ( World Bank, 1998 ) . This increased the exposure since those capital influxs could be by big reversed and there were limited options to those kinds of capital resources.

Weak Fiscal Discipline

One signifier of relentless authorities intercession in fiscal sector was the acceptance of inhibitory policies. This allowed authorities to hold an easy entree on private nest eggs to finance its outgos and shortages which encouraged a rise in authorities disbursement and enlargement of public endeavors. In 1978 as shown in the Figure 1, there is a measure rise from around 19 per cent to above 25 per cent by 1982 whereas the private investing remained low. Hence, such public-sector driven growing deteriorated financial subject bit by bit and generated greater dependance on foreign adoption.

Share of Public and Private Investment in Mexico 1970-1992

Beginning: World Bank, Mexico 1998

Figure 1

Besides, authorities absorbed an increasing portion of banking system sedimentations by enforcing high modesty demands. The effectual modesty ratio rose to 63 per cent in 1973 which mostly absorbed the financess to ease activities of private endeavors ( Buffie, Krause, 1989 ) . This is another penetration on how effete the financial model was and how it soaked up invention and edification from the fiscal sector that could hold transcended the fiscal environment into more competitory signifier.

Bank Sector and Stock Market Weaknesses

Mexico, for most parts, had a ill developed fiscal markets consisting of weak banking system and stock markets. An empirical survey conducted by World Bank in 1998 took a sample of 43 states and measured the fiscal market development in footings of banking sector ( Bank and Depth ) and stock market ( Liquidity and MCAP ) . In table 2, Mexico ‘s Bank and Depth both ranked last ( 43rd ) out of 43 states, besides stock market reflected similar consequences with Liquidity ranking 37th and MCAP 36th in the twelvemonth 1970-1994.

Table 2. Ranking Mexico ‘s Financial System

( Ranking are based on mean period informations )

Fiscal Market Development Indexs


Rank No. Obs

Banking Sector



43 43

43 43

Stock Market



37 43

36 42

Beginning: World Bank, Mexico 1998

Although Mexico experienced several alterations during this stage and this ranking comprised some premises, it gives a snapshot of where Mexico stands among many other states in context of fiscal reputation. Studies show that Mexico ‘s fiscal system has ever been developing but it was non as economically deteriorated in the 60 ‘s as of the clip since 1970 ‘s and 80 ‘s. This is because its fiscal system could non turn along with the international degree which is why it set off into macroeconomic instability and the developing fiscal system further aggravated its susceptibleness towards debt crisis in 1982.

External forces that led to Debt Crisis

The First Oil Shock ( 1973 ) and Petrodollar recycling

Real Oil Price

( WTI in changeless USD of July 2005 )

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Beginning: Clasp

Figure 1

The sudden hiking of oil monetary values is considered as oil daze and the first oil daze took topographic point in 1973-1974 as clearly seen in Figure 1. This incidence affected Mexico in following ways ( Cardoso and Fishlow, 1990 ) : The immediate consequence of first oil daze was that there was liquidness crunch and big trade shortages in the economic system, so they needed to borrow more. Second, the international Bankss were flushed with extra hard currency deposited by OPEC ( Organization of Petroleum Exporting Countries ) which they thirstily loaned to developing states including Mexico who were in demand of financess.

To spread out, OPEC gained excess wealth because of oil monetary value rise which were deposited in dollar histories located outside US, known as Euro dollar sedimentations. At the same clip, oil monetary value rise caused big shortages which increased the demand of loanable financess in Mexico and other states such as Brazil and Argentina. The international Bankss with otiose sedimentations of oil grosss readily provided loans at variable rate. This formed a rhythm of petro dollar recycling.

Petrodollar Recycling

Oil Importing – Developing States



International Commercial Banks Made Oil Payments Dollar Deposits

Loans for Development Undertakings

Figure 2

Mexico was one of those oil importing states that made oil payments to OPEC, who in bend deposited them in dollar histories at international commercial Bankss as seen in Figure 2. The extra dollar sedimentations were so recycled as loans by the international Bankss to many developing states like Mexico and these states became bit by bit dependent on these sorts of loans ( GRIPS, 2010 ) . A barbarous rhythm of inordinate loaning and adoption was organizing among the take parting states and establishments which structured the footing of debt crisis in the 1980 ‘s.

Second Oil Shock ( 1979 )

The bubble exploded in the aftermath of the 2nd oil daze ( 1979 ) ( as can be referred to Figure 1 once more ) when the industrialised states, which had hardly recovered from the first daze, were thrown back into recession. Demand for Mexico ‘s exports collapsed, finally even the monetary value of crude oil declined aggressively ( Cardoso and Fishlow, 1990 ) . Interest payments on the debt accumulated during the re-cycling old ages absorbed a enormous sum of export net incomes and domestic nest eggs, mostly because most of the debt was at variable involvement rates. At the same clip the supply of capital from the remainder of the universe besides dried up.

Increasing Trend of Borrowing

The decennary of 1972-1982 constituted of series of overborrowing that was peculiarly escalated by the first oil daze in 1973. The patterned advance of this tendency can be depicted in the graph below:

Latin America ‘s Persistent Debt 1975-1987

Beginning: IDRC, 1991

Figure 3

In figure 3, an promoting inclination of adoption by Latin America can be vividly observed. States in Latin America including Mexico had a entire debt of 68.5 billion dollars in 1975 and it escalated by about 5 fold i.e. upto to 318.4 billion dollars by 1982 when the crisis occurred. This rate of adoption and loaning was quickly doing Mexico and other Latin states really vulnerable towards fiscal hardship but however they optimistically borrowed unaware of the bubble that could split into a catastrophe.

Increased Dollar involvement rates and its inauspicious effects

In 1979, the president of US Federal Reserve Board ( American Central Bank ) Mr. Paul Volcker initiated anti-inflation run which required the Fed to fasten its money supply from 1979-1980. Consequently, the dollar involvement rate shot up aggressively even up to 20 % a twelvemonth or above. The aims of the anti-inflation run were met in the long tally but in that period this caused economic lag in US and in remainder of the universe ( FDIC, 1997 ) . As mentioned in the old point, Mexico was vastly indebted with immense sums of financess and the rise of dollar involvement rate soberly exacerbated their state of affairs because of following grounds:

Debt service payments rose aggressively in consequence of rise in dollar involvement rate. For this ground, indebted states like Mexico all of a sudden had to confront great trouble in serving their debt payments.

Besides, since there was planetary economic lag, the demand of export besides fell quantitatively which enlarged their trade shortages in the most inappropriate clip as they were in the thick of immense debt load ( GRIPS, 2010 ) .

Next, the universe trade good monetary values of minerals and agricultural goods besides declined. Mexico ‘s productiveness mostly relied on the mobilisation of resources such as minerals, agricultural goods and energy and this incidence farther degraded its capacity to serve its debt.

Furthermore, in early 1980 ‘s in response to high involvement rate, the value of dollar exchange rate besides started to increased. The value of dollar exchange rate in 1981 was 11 per cent and it rose to 17 per cent in the following twelvemonth 1982 against strong currencies such as German Mark and Nipponese Yen. Since Mexico ‘s debt was largely dollar denominated the trouble to run into their debt committednesss intensified. Despite such troubles, Mexico continued to borrow to a great extent as seen in Figure 3 where overall Latin America ‘s debt doubled from 1979 with 182 billion dollars to 1982 with 318.4 billion dollars ( FDIC, 1997 ) .

The Onset of the Debt Crisis in 1982

The old subdivisions examine some possible factors that led to the eruption of debt crisis in Mexico in the 1880ss. The developing and vulnerable fiscal system of Mexico was hit by series of events, chiefly the Federal Reserve ‘s determination to increase the involvement rate in order to control its oil based rising prices that slowed down the planetary economic system and triggered the debt crisis. This besides caused a crisp diminution in trade good monetary values coupled with slack in the demand of exports. In this scenario, Mexico was derailed from puting in development/productive undertakings and used its loan to run into up the payments of accumulated involvement on the current debts which entangled it into a barbarous circle of hindering debt.

The debt crisis began on August 12, 1982 when the Mexican finance Minister notified the president of Federal Reserve, secretary of the exchequer and the pull offing manager of IMF that the state will be unable to run into its $ 80 billion debt duties. In add-on there were other 40 developing states at that clip had defaulted on their foreign loans breeding a planetary bankruptcy crisis by the twelvemonth terminal of 1982. In 1983, four major counties of Latin America including Mexico, Brazil, Argentina and Venezuela proposed to reconstitute their loans. The rate of bank loaning declined bit by bit from $ 56 billion to $ 44 billion ( FDIC, 2010 ) .

After the eruption of the crisis, the state underwent a lost decennary which signifies the stagnancy of economic system and loss in the societal public assistance. The debt load was so immense that most resources were channeled to run into involvement payments to commercial Bankss alternatively of puting in productive undertakings that significantly hampered the already developing fiscal system. The labour market was besides extremely deformed because of the rise in informal sector as a consequence of uncertainness and insecurity in the labour market which signals lower part to the economic system and overall lower productiveness growing ( Latin America and Caribbean Region, World Bank, August, 1986 ) . This is when GDP per capita slipped into negative rate and the economic growing degraded, retarding the velocity of recovery from the debt load.

Recovery schemes

Two international organisations viz. , World Bank and IMF, conducted new loaning installations ( GRIPS, 2010 ) :

World Bank introduced Structural Adjustment Loan ( SAL ) and Structural Adjustment Credit ( SAC ) that operated with commercial involvement rate and concessional involvement rate severally.

IMF proposed structural accommodation installation ( SAF ) which worked on the rule of instance by instance attack via Bank consultative commissions.

Besides, Brady program was constructed to implement market based decreases where indebted states could purchase their ain debts in secondary market at price reduction. Mexico made full usage of this program and continued to take part in other economic, fiscal and societal reforms.


The fiscal crisis of Mexico of the 1880ss partially originated from internal province of personal businesss that were adversely augmented by sequence of unfavourable external events. Until 1960 ‘s Mexico projected healthy GDP growing that averaged 6 % yearly hence the set off of the crisis was non perpetuated by gradual diminution of end product or employment over the old ages instead the economic system was one of the quickly turning counties in Latin America. However, uninterrupted macroeconomic misdirection can be observed since 1970 ‘s that left Mexico in dwindling fiscal place.

The internal facets of Mexico configured a vulnerable scenario and were partly responsible for the debt crisis of the 1880ss because its macroeconomic instability and financial undiscipline drove the economic system towards high financial shortages that caused its disposition towards foreign adoption. In the absence of appropriate monitoring mechanisms and Torahs, most houses, Bankss and fiscal markets were unqualified to execute on international scene.

To exceed it up, there was enormous misallocation of resources that drained the investing on sophisticated and advanced undertakings instead the concentration was more on low return assets. For this ground, when authorities outgos and figure of public sector mounted, Mexico faced high financial shortages and therefore, even more dependent on foreign adoption which forms a likely status for a debt crisis to happen.

Unaware about the extroverted crisis, Mexico to a great extent borrowed after the first oil daze which instigates the influence of external events. The primary ground for the debt crisis to take topographic point was the tendency of over loaning and adoption by international commercial Bankss to developing states like Mexico with the purpose of patronizing development undertakings but this pattern backfired when US Federal Reserve increased the dollar involvement rate to control its oil-based rising prices. Debt crisis surged as Mexico its debt-service cost shooting up and with falling grosss and immense debt, the state was unable to run into its debt duties of August 1982.

Mexico faced a decennary long economic stagnancy characterized with halt fiscal sector, unemployment and uncertainness. IMF and World Bank operated several debt alleviation schemes that helped Mexico to retrieve to some extent. However, it is more important to reconstruct assurance in domestic manufacturers, labour market and beef uping macroeconomic basicss so that resources could be mobilized and capitalized to ease economic growing and development.