(d) derive lessons from the Mexican experience that may be useful for other developing
countries.
There are some lessons after doing close examination of the Mexican peso crisis, as well as
precious foreign exchange crises. These concerns both macroeconomic capital flow
management as well as the style and the pace of capital account and financial sector
liberalisation. The first lesson is to avoid unsustainable current account deficits, especially for
longer periods of time (more than 1 or 2 years). It's difficult to know ahead of time what levels
of current account deficit are sustainable which is will continue to be financed. Second, it is
critical to prevent excessive currency overvaluation, even though it is tempting to governments,
as it was to the Mexican government in 1992-94, because it helps lower inflation faster. Since,
in the event of a recession, not only will production decline, but inflation will also rise
dramatically, as it did in Mexico in 1995. Third, economic authorities should avoid taking on
foreign exchange risk of short-term government debt at all costs (as the Mexican authorities
did on a large scale by issuing very significant amounts of Tesobonos). Furthermore, even
though this means slightly higher interest rates, it might be preferable to shift the composition
of government debt to more long-term paper. Large-scale international acquisitions of shortterm government debt, in particular, should be avoided. Finally, the analysis of the Mexican
peso crisis revealed that, due to the instability of capital flows, very open economies need
much higher foreign exchange reserves than in the past. Sharp decline in foreign exchange
reserves necessitate immediate policy action and can never be ignored as a temporary
problem.
A developing country should concentrate on its domestic market and avoid interfering in
foreign markets in order to keep its currency's value up. Political stability is another factor to
developing countries that worsens large expenses and worsens money supply and currency
problems.
Reference:
Griffith-Jones, S. (1998). Causes and lessons of the mexican peso crisis. Global Capital
Flows, 100-136. doi:10.1007/978-1-349-26912-9_5
Musacchio, A. (2013). Mexican financial crisis of 1994–1995. The Evidence and Impact of
Financial Globalization, 657-667. doi:10.1016/b978-0-12-397874-5.00023-3