The political economy of Mexico's financial reform, 1988-1994
The global dimension of Mexico's 1994 financial crisis brought a renewed interest in the institutional framework of international finance. The failure of Mexico's financial reform raises important questions. At the level of policy-making, the prescriptions based on the premise of less state intervention and a major role for the market have to be taken more cautiously. At the level of analysis, the role of institutions has to be emphasised more in the explanations of the effects of policy decisions upon economic behaviour. The purpose of this thesis is twofold. First, it tries to explain President Salinas's success in implementing a far-reaching programme of economic liberalisation, despite the fact that pro-market policies are not particularly popular in Mexico. Second, it tries to explain the apparent failure of the financial reform, despite the fact that it conformed to the dominant orthodoxy and was implemented by a technically proficient technocracy. The favoured approach in this thesis says that Mexico's financial reform was the result of political entrepreneurship. The charismatic leadership of President Salinas aligned a powerful coalition of support for economic reform. Salinas used extensively the organisational and institutional infrastructure of the quasi-authoritarian Mexican state to overcome the 'legitimacy deficit' of his government. Regarding Mexico's 1994 financial crisis, the evidence points to the combination of three sets of interrelated factors. First, the financial reform stifled domestic savings and re-directed most of the capital inflows towards portfolio investment. Second, the end- of-sexenio political cycle that produced a great deal of political turmoil and economic uncertainty. Third, the policy mistakes that exacerbated the size and depth of the crisis. The thesis is organised into three parts. The first part-chapters one to four-develops the framework, both theoretical and historical. The analysis addresses four main themes: state autonomy, external dependency of domestic states on international capital, political change under President Carlos Salinas and financial policy. The second part presents the analysis of three cases of institutional change in the financial system-development banking reform, commercial banking privatisation and autonomy of the central bank. Each case study shows how the reforms conformed to the ideas of the dominant consensus on economic policy and how they delivered an inefficient incentive structure. The third part-chapter eight-brings together all the elements presented throughout the thesis to establish the relationship between the financial reform under President Salinas and the 1994 financial crisis.