Financial liberalization in Mexico, 1989-1993
Mexico liberalized its banking system in 1989 and 1990 and privatized it from mid-1991 to mid-1992. This study first sets those institutional changes in the context of past Mexican financial development, examining the role of the financial sector in achieving macro balance and demonstrating the close relationship between changes in fiscal policy during the 1980's and financial liberalization.
Next it examines the behavior of the banking sector and of the larger individual banks during the 1989-1993 period, arguing that especially after privatization these institutions behaved in risk-seeking ways that sought short-term profits at the expense of long-term viability. A remarkable part of this search for near-term profit was the very rapid expansion of consumer lending.
The dissertation then turns to the behavior of the large private firms listed on the stock exchange, with particular attention to their rapid accumulation of dollar-denominated debt and peso-earning liabilities. It is argued that both bank lending and patterns of investment by firms were skewed to the nontraded sectors, which can certainly be attributed to the way that the pegged exchange shifted relative prices against traded goods, but which is nonetheless difficult to defend as a long-term strategy. These firms may have expected the kind of post-devaluation bailouts they received after the 1982 crisis.
Finally these investigations are brought together to examine the macroeconomic coherence of Mexican government policy, and to root the failures of the liberalization process in the country's political economy. Orthodox financial liberalization theory is shown to make institutional assumptions about the real economy, and particularly about the behavior of large firms, that may not be warranted. If these assumptions do not hold financial liberalization may damage growth and stability.
0617: Public administration