Mexico's Economy: the crisis, the recovery and the policy options

The economic policies implemented in Mexico to confront the December 1994 crisis, even though instrumental in coping with the external deficit caused a strong recession coupled with falling real wages and a worsening in income distribution. These effects of the adjustment strategy stem from its contractionary impact on aggregate demand and supply. The recovery from the crisis was not the consequence of the strategy implemented, but rather of the evolution of the international economy as well as some modifications in the fiscal policy stance. An alternative economic strategy, based on subsidizing domestic production, would stimulate the recovery by promoting utilization of idle productive capacities, and moderate inflationary pressures. Besides that, selective fiscal and monetary policies must be implemented, and a mechanism to control capital flight has to be devised.