Mexico: Foreign Investment and Democracy

Abstract

The goal of this book is to assess the effects of foreign capital inflows on macroeconomic policy-making and democracy. The case of Mexico is particularly interesting for two reasons. First, from 1990 to 1993 net capital inflows to Mexico summed to $52.8 billion, more than to any other developing country. China with $49.2 billion, and Argentina with $24.5 billion, were the next most popular destinations (de la Dehesa, 1994, p. 5). A significant percentage of the inflows to Mexico were portfolio investment,¹ which made capital flows particularly sensitive to any event that could impact short-term profits. These enormous flows were possible thanks to a process of macroeconomic reform, widely perceived as creating the basis for long-term growth, and financial liberalization. By 1994, however, foreign flows had started to contract as a result of both international conditions, mainly a rise of US interest rates, and domestic ones, mainly the uncertainties regarding the political stability of the country (Krugman, 1995, pp. 28–44). By December 1994, capital flight had become unsustainable, forcing the new government to devalue the peso. The devaluation triggered a deep financial crisis not only in Mexico but in other emerging markets, that could only be controlled thanks to a US-sponsored international financial aid package amounting to over $50 billion.