Alberro, José, “La Dinámica de los Precios Relativos en un Ambiente Inflacionario,” Estudios Económicos (Mexico), special issue (October 1987), pp. 267–304.
Bucay, Nisso, and Eduardo Pérez Motta, “Trade and Trade Policy in Mexico” (mimeographed, El Colegio de México, Mexico, November 1986).
Buffie, Edward F., “Economic Policy and Foreign Debt in Mexico,” in Developing Country Debt and Economic Performance, Vol. 2: Country Studies, ed. by Jeffrey Sachs (University of Chicago Press, forthcoming).
Calvo, Guillermo, “Controlling Inflation: The Problem of Nonindexed Debt,” IMF Working Paper, WP/88/29 (Washington: International Monetary Fund, 1988).
Córdoba José, and Guillermo Ortiz, “Aspectos Deflacionarios de la Devaluación del Peso Mexicano de 1976,” Demografía y Economía (El Colegio de México, Mexico, 1981).
De Mateo, Fernando, “Trade Policy in Mexico and the GATT,” (mimeographed, Secretary of Commerce and Industrial Development, Mexico, September 1987).
Dornbusch, Rudiger, “Open Economy Macroeconomics: New Directions,” NBER Working Paper, No. 2372 (Cambridge, Massachusetts: National Bureau of Economic Research, August 1987).
Dornbusch, Rudiger, “Mexico: Stabilization, Debt and Growth,” (mimeographed, Massachusetts Institute of Technology, Cambridge, May 1988).
Easterly William, A Computable General Equilibrium Model of Mexico with Portfolio Balances (doctoral dissertation, Massachusetts Institute of Technology, Cambridge, 1985).
Gómez Oliver, Antonio, “Private Consumption and Saving: The Cases of Mexico and Chile” (mimeographed, International Monetary Fund, June 1988).
Haque, Nadeem and Peter Montiel, “Ricardian Equivalence, Liquidity Constraints and the Yaari-Blanchard Effect: Test for Developing Countries,” IMF Working Paper, WP/87/85 (Washington: International Monetary Fund, 1987).
Ize, Alain, “Fiscal Dominance, Debt, and Exchange Rates,” IMF Working Paper, WP/87/52 (Washington: International Monetary Fund, August 1987).
Ize, Alain, and Guillermo Ortiz, “Fiscal Rigidities, Public Debt, and Capital Flight,” Staff Papers, International Monetary Fund (Washington), Vol. 34 (June 1987), pp. 311–32.
Obstfeld, Maurice, “A Theory of Capital Flight and Currency Depreciation” (mimeographed, University of Pennsylvania, February 1988).
Ortiz, Guillermo and Jaime Serra, “A Note on the Burden of the Mexican Foreign Debt,” Journal of Development Economics (North Holland, Amsterdam), Vol. 21 (1986), pp. 111–29.
Pyndick, R., “Irreversible Investment, Capacity Choice, and the Value of the Firm,” NBER Working Paper, No. 1980 (Cambridge, Massachusetts: National Bureau of Economic Research, 1986).
Zedillo, Ernesto, and Leopoldo Solís, “Algunas Consideraciones Sobre la Evolución Reciente y Perspectivas de la Deuda Externa de México,” Estudios Económicos (El Colegio de México, México), Vol. 1 (January 1986).
An earlier version of this paper was presented at the Conference on “New Sources of Growth in Latin America,” sponsored by the World Peace Foundation in Caracas, Venezuela, on June 28-30, 1988, and will be published in its proceedings, Beyond the Debt Crisis: Latin American Growth Strategies for the 1990s, edited by Albert Fishlow. The author thanks José Alberro, Eliot Kalter, Fred Ribe, and Carlos Noriega for help in obtaining the statistical base. Chris Vu and Eric Sidgwick provided valuable research assistance.
Consumer price index (CPI), December to December.
In particular, firms were allowed to deduct full nominal interest from their income tax base, which was equivalent to providing a credit subsidy that rose with inflation. Estimates of the magnitude of the Tanzi effect for Mexico in recent years can be found in Gil Díaz and Ramos Tercero (1987). They range from 0.6 to 0.8 percent of GDP.
As measured by industrial wages deflated by the GDP deflator.
Interestingly enough, the wage bill of the public-owned petroleum company (PEMEX) fell by only 5 percent, which reflects the strategic importance of that sector in wage bargaining.
Fiscal adjustment would have been obviously much easier in a fast-growing economy, since it could have been done without painful cuts in the absolute levels of the services provided, involving in particular the size of the bureaucracy.
After falling by half from 1977 to 1981, the real price of gasoline jumped nearly threefold from 1981 to 1983.
There are some discrepancies between figures given in the financial matrix and the net resource balance of each sector, as shown in the overall resource balance, which reflect some of the limitations of this exercise. However, the discrepancies are generally rather small—within 1 percent of GDP.
The proportion of dollar-denominated deposits remained at around 25 percent from 1977 to 1981, up from around 5 percent in the early 1970s.
The rate given per month is the compounded return from month t-3 to month t+2. It is thus a combination of backward- and forward-realized returns.
Real interest rates tend to fall around the beginning of each year, as nominal interest rates do not vary to offset higher inflation, owing to controlled price and wage realignments.
A theoretical analysis of linkages between fiscal developments, capital flight, and exchange rate dynamics with an application to the case of Mexico can be found in Ize and Ortiz (1987).
At its peak in early October 1987, the index had risen in real terms 29 times over its end-1982 level.
Firms also started to alter their financing mix in 1987 as a result of the reforms of the corporate income tax that progressively phased out the deductibility of nominal interest payments.
In addition, there would be, in principle, another model combining
As documented in Section IV, one possible reason for the inconclusiveness of average trend figures is the large shift in the distribution of income, which seems to have taken place after the crisis and which, other things being equal, could have pushed the savings ratio upward.
Total private foreign debt rose from 9.5 percent of GDP at end-1981 to about 24 percent at end-1983. On the impact of devaluations on the financial position of firms and their investment decisions in Mexico, see Cordoba and Ortiz (1983) and Easterly (1985).
As the option-pricing literature seems to suggest, a wait-and-see attitude could occur even if investing within the range of observed exchange rates has consistently remained profitable. If investments are bulky and nonreversible, it may pay to wait until the steady-state exchange rate is known. See Pyndick (1986) and Dornbusch (1987).
Alberro (1987) analyzes the variance of relative prices in Mexico and argues that relative price confusion has probably been responsible for a significant backward shift of the supply curve.
See, as an illustration, the real price of two main energy products, gasoline and electricity, shown in Chart 14.
Controlled items represented only about 25 percent of import value at end-1987 versus 85 percent in 1984. On the other hand, the production-weighted tariff has fallen from 29 percent in mid-1985 to about 14 percent at end-1987.
On the details of this agreement and other recent developments in Mexican trade policy, see De Mateo (1987) and Bucay and Perez Motta (1987).
An estimated 35 percent of non-oil Mexican exports to the United States were affected in 1983 by nontrade barriers of one kind or another. (See De Mateo (1987).)
One agreement, signed in 1985, required U.S. firms to give “proof of injury” in order to qualify for countervailing duties. The other, signed in 1987, established a framework for discussion of bilateral trade issues between the two countries.
Employment in in-bond industries increased from 127,000 in 1982 to 233,000 in March 1986, or 11 percent of total industrial employment, while employment in the rest of the industrial sector fell by 12 percent during the same period.
In particular, the profit share includes the self-employed and the informal sector, which probably expanded after the crisis. However, an extreme correction made on the basis of a 3 percent yearly increase in employment after the crisis still yields an increase of more than 5 percentage points of GDP of the profit share (see Table 9).
This conclusion is supported by an industrial survey by Banco de México, which indicates that bank financing became a significant production constraint only at the end of 1985 and during 1986.
The model assumes that Ricardian equivalence does not hold, even in partial form. This assumption seems to be backed by the data, as alternative consumption functions that include government spending instead of taxes seem to lead to much more variable average saving propensities. See also Haque and Montiel (1987) for wider econometric evidence derived from a sample of developing countries.
The ICOR value is obtained as: v = i/(δ + g), where δ is the rate of depreciation.
The higher price of imported machinery seems to be offset by the lower price of construction, owing to the fall in real wages.
A value of 2 would also correspond to an interpolation of the average oil boom ICOR of 1.8, obtained on the basis of a 30 percent real devaluation on a 33 percent share of imported machinery, assuming no reduction of capital intensity.
Private savings are assumed to be unaffected by changes in real interest rates, which may not be entirely realistic, particularly in view of the fact that recent estimates of the consumption function in Mexico do seem to indicate some significant interest elacticity (see Gomez Oliver (1988)). Given the range, however, of the elasticities that have been found (around 0.3), and the size of the domestic public debt (around 20 percent of the GDP), the increase in private savings resulting from an increase in the real deposit rate would nearly be entirely offset by a fall in public savings, with no significant effect on overall savings.
Notice, however, that these figures may be altered to a significant extent, depending upon the final outcome of the current stabilization scheme. Petroleum revenue and income from other parastatals could turn out to be substantially lower if the Government is forced to accept some appreciation of the peso and lags in public sector prices as the price to pay for stabilizing inflation. On the other hand, tax revenue may increase somewhat as a result of the Tanzi effect.
This corresponds to the amount necessary to maintain the ratio of foreign reserves to GDP at its average 1986-87 level, assuming average growth at 4 percent of GDP.
The model assumes away the possibility of having a fall in private savings induced by a positive wealth effect on consumption.
This corresponds to a 25 percent increase over average domestic prices in 1986-87.
Maintaining high levels of public sector prices without a relapse of inflation, however, could turn out to be extremely difficult in the context of a price stabilization program. In this case, fiscal adjustment would need to be reached through less inflationary measures.
In 1895 the value-added tax generated only about 3 percent of GDP in revenues, at a general rate of 15 percent.
As noted before, however, further cuts in noninterest current spending could be needed to offset possible lags in public prices resulting from current stabilization efforts.
This assumes that interest earned on financial assets abroad would be repatriated.
The desire to keep this option open is, in fact, probably what mostly prevented the Government from introducing indexed financial instruments or from preannouncing specific adjustment rules for the exchange rate after 1982.
The recent Brazilian experience, with shifts out of indexed domestic assets in the presence of rising inflation, seem, on the other hand, to indicate that indexation of financial instruments is no guarantee against shifts in asset demands, particularly if these assets are of a very short-run maturity.
Most of the current activity of brokerage houses in Mexico involves government paper rather than private instruments.
Some indexed government bonds were introduced in mid-1986, but the index used so far has been the controlled exchange rate, which has limited their attractiveness.
It is not clear, however, whether the index should be the exchange rate or the price level. The former would clearly provide more effective coverage against the risk of a sudden devaluation. However, the dollarization of the domestic financial system has several drawbacks, which were clearly brought into evidence in 1982. In particular, if the public loses confidence in domestic dollar-denominated instruments, movements in the exchange rate do not provide, a strong insulating mechanism against further speculation, as they do not directly affect the comparative expected return of actual and virtual dollars. Relatively long maturities and temporary freezes of dollar deposits in cases of panics could be alternative ways to deal with this issue.
A discussion of linkages between capital flight, fiscal strength, and capital controls can be found in Ize (1987).
Interest paid by development banks was imported to the public sector.
The domestic primary public deficit is defined as the primary deficit, net of PEMEX export revenue.