Hi, thanks for the question. I have provided you with information
related to your query in this order: 1. Macroeconomic backround
information on devaluation and the case of Mexico specifically. 2.
Statistical data on devaluation in general and in regards to Mexico
especially. 3) Graphical data.
The statistical and graphical information relates primarily to the
concept of the "J-Curve" which expresses the correlation between
devaluation and a country's trade balance. I will define this concept
and then provide evidence as to how the J-Curve can be used to express
the effects of devaluation in Mexico specifically. If you need me to
clarify, please let me know.
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1) Background Information:
A. General Info:
Conventional macroeconomic analysis of devaluation- its causes and effects:
A case study of a currency crisis: The Russian default of 1998
Federal Reserve Bank of St. Louis 84, no. 6 (Nov/Dec 2002): p. 7-17
Full-text source: ABI_INFORM_FT
"A currency crisis is defined as a speculative attack on country A's
currency, brought about by agents attempting to alter their portfolio
by buying another currency with the currency of country A.2 This might
occur because investors fear that the government will finance its high
prospective deficit through seigniorage (printing money) or attempt to
reduce its nonindexed debt (debt indexed to neither another currency
nor inflation) through devaluation. A devaluation occurs when there is
market pressure to increase the exchange rate (as measured by domestic
currency over foreign currency) because the country either cannot or
will not bear the cost of supporting its currency. In order to
maintain a lower exchange rate peg, the central bank must buy up its
currency with foreign reserves. If the central bank's foreign reserves
are depleted, the government must allow the exchange rate to float
up-a devaluation of the currency This causes domestic goods and
services to become cheaper relative to foreign goods and services. The
devaluation associated with a successful speculative attack can cause
a decrease in output, possible inflation, and a disruption in both
domestic and foreign financial markets."
Effects of devaluation:
http://www.theallineed.com/ad-business-4/business-024.htm
"But this is all in an idealized country which really exists nowhere.
In reality, devaluation tends to increase inflation (=the general
price level) and thus have an adverse macro-economic effect. Six
mechanisms operate immediately following a devaluation:
The price of imported products goes up.
The price of goods and services, denominated in foreign exchange goes
up. An example: prices of apartments and residential and commercial
rentals is fixed in DEM. These prices increase (in terms of MKD) by
the percentage of devaluation - immediately! The same goes for
consumer goods, big (cars) and small (electronics).
Exporters get more MKD for their foreign exchange (and this has an
inflationary effect).
People can convert money that they saved in foreign exchange - and get
more MKD for it. A DEVALUATION IS A PRIZE GIVEN TO SPECULATORS AND TO
BLACK MARKET OPERATORS.
Thus, the cost of living increases. People put pressure on their
employees to increase their salaries. Unfortunately, there is yet no
example in history in which governments and employers were completely
successful in fending off such pressures. Usually, they give in,
wholly or partially."
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B. Mexico Devaluation Crisis Info:
Mexico's Financial Sector Crisis: Propagative Linkages to Devaluation
The Economic Journal, Vol. 110, Issue 460, January 2000
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=233429
Background on Mexico's devaluation crisis:
"The sharp 1994 Mexican peso devaluation was followed by a
financial-sector crisis, forcing the Mexican government to retake
control of several banks and to grant substantial assistance to many
others. This paper tests several hypotheses concerning the impact of
devaluation. First, event-study methodology is used to test whether
some sectors of Mexican economy were 'devaluation-gaining' while
others were 'devaluation-losing'. Second, we test whether devaluation
shocks were transmitted to the financial sector through the liability
side versus the asset side of bank balance sheets. Our results
indicate the importance of asset diversification."
THE MEXICAN ECONOMY AND THE BORDER REGION SINCE DEVALUATION
By Dr. Jim Peach, Professor of Economics, New Mexico State University
http://www.nmsu.edu/~frontera/old_1996/oct96/1096econ.html
"In December 1994, the Mexican economy entered its worst recession
since the great depression of the 1930s. During 1995 Real Gross
Domestic Product (RGDP), the broadest measure of economic activity,
declined by 6.94 percent; inflation, as measured by the Consumer Price
Index (CPI) reached 51.97 percent; the open unemployment rate reached
levels not previously recorded by the current statistical system; the
peso which had traded at 3.3 to the U.S. dollar in early December 1994
was trading at 7.7 to the dollar by December 1995; and, the index of
Mexican stock prices (Bolsa de Valores) declined by more than a third
in the first months of 1995."
Mexico today: bouncing back from the peso crash - prospects for growth
Business Economics, July, 1999 by Jonathan Heath
http://articles.findarticles.com/p/articles/mi_m1094/is_3_34/ai_55294824
Causes of the devaluation:
"The Mexican government was criticized for making bad policy decisions
in 1994, which eventually led to the peso crash. However, the weakness
of the banking system constrained the government's maneuvering room
and the excessive growth in credit was probably the main reason
leading up to the devaluation in December."
Defecits can cause devaluation:
http://lanic.utexas.edu/cswht/paper2.html
"Devaluation of the Mexican peso resulted from familiar causes: a
sizeable and growing current account deficit (i.e., an excess of
imports over exports), over-expansion of the money supply, and
over-reliance on short-term borrowing."
http://www.polyconomics.com/searchbase/g2-10-95.htm
"There was no grand conspiracy here -- no men with long cigars sitting
about and plotting larceny. It is rather more like the Kansas
sunflower conspiracy. In the morning, the sunflowers face east, in the
evening they face west. They never speak to each other, but move with
the sun. In this case, the guiding force was the idea that the peso
had to be devalued, because, as Ortiz told the Congress: "The deficit
in the current account was at almost a yellow warning light in the
international financial reports and in the greater part of the foreign
stock exchanges. As we all know, on the 4th November, upon analyzing
the latest presidential report, we pointed out that the peso was
overvalued." Of course it was not. A government's promise to its
people cannot be overvalued."
The effect of devaluation on trade:
"In 1983 a trade balance surplus was achieved through a small increase
in exports and a tremendous restriction on imports. In 1995 only a
small initial drop in imports was observed, while virtually all of the
adjustment came through export growth. By January 1996, import levels
were back to predevaluation levels. In large, import growth was due to
the high import content of exports, while the importation of capital
and consumer goods dropped substantially.
Export growth proved to be the savior of many firms throughout
1995-96, given the huge drop in domestic activity. In order to expand
installed capacity in these firms, investment outlays grew at
double-digit rates. By mid-1996, many manufacturing sectors with a
high export bias reached new historical production peaks. However,
salaries suffered a very large contraction, reducing purchasing power
by a large margin for most of Mexican society. Although unemployment
increased by a large margin, it was contained by the tremendous amount
of wage flexibility. Many firms gave no salary increases at all during
1995 while inflation increased 52 percent."
Devaluation can increase export advantages by decreasing real wages:
http://www.polyconomics.com/searchbase/g2-10-95.htm
"We really do not have to speculate on why this was happening. On
January 23, Mexico's Finance Minister, Guillermo Ortiz, told the
Chamber of Deputies in Mexico City that the international financial
institutions endorsed the idea in the months leading up to the
devaluation, and so did "stockbrokers and analysts." My first thought
upon hearing of the devaluation was that the export industries of
Mexico had brought pressure on the government -- to gain a bit of an
export advantage by lowering the real wages of the Mexican work force.
This is exactly what the opponents of the North American Free Trade
Agreement had predicted would occur."
http://www.mexico-trade.com/macro.html
"To date, despite recession and instability, foreign investment flows
have improved. In the first semester, new foreign inflows reached
US$3.12 billion. The Zedillo administration continues to emphasize a
commitment to increase direct foreign investment by new privatization
and property ownership laws. This will help ameliorate the bitterness
of the austerity program and the harsh conditions imposed by the
Clinton administration and the IMF in order to guarantee the success
of the US$52 billion bailout package. The strictness is evident in the
rubrics of monetary and fiscal policy"
http://www.mexico-trade.com/macro.html
"The first quarter results place special emphasis on the reversal of
the trade deficit as a sign that the strict measures of austerity and
devaluation are "working out." Thus, the Zedillo administration is
citing success on the basis that the current account deficit, the
alleged culprit behind the devaluation and the ensuing financial and
exchange-rate crisis, has been transformed into a balance. On the
other hand, a sharp drop in demand for foreign goods is inevitable in
an economy characterized by recession and rising unemployment. So
construed, a current account surplus is not necessarily a reflection
of a healthy economy. For instance, the auto industry, a standard
barometer of economic activity, has experienced its worst crisis in
seven years: first quarter sales are down 63.7% in comparison to 1994
-even despite the advantages of lower trade barriers due to phase out
periods in NAFTA. It is expected that 30% of all dealerships will
close down. This is equivalent to a net loss of 75,000 lots."
Summary:
An unstable banking system largely contributed to the devaluation in
1994. Its effect on trade was moderate, however, because the NAFTA
kept exports from plunging and preserved an incentive for foreign
investiment (although NAFTA may have contributed to the devaluation
itself). The U.S. also provided significant foreign aid after the
crash. The exports that were lost quickly bounced back a couple of
years after the peso-crash.
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2) Statistical Analysis; The J-Curve and devaluation:
J-CURVE
The Economist
http://www.economist.com/research/Economics/alphabetic.cfm?TERM=J%2DCURVE#J%2DCURVE
"The shape of the trend of a country?s trade balance following a
DEVALUATION. A lower EXCHANGE RATE initially means cheaper EXPORTS and
more expensive IMPORTS, making the current account worse (a bigger
DEFICIT or smaller surplus). After a while, though, the volume of
exports will start to rise because of their lower PRICE to foreign
buyers, and domestic consumers will buy fewer of the costlier imports.
Eventually, the trade balance will improve on what it was before the
devaluation. If there is a currency APPRECIATION there may be an
inverted J-curve."
Statistical analysis of Mexico using the J-Curve:
Mexico in Crisis
http://www.dtic.mil/doctrine/jel/research_pubs/crisis.pdf
Statistical and graphical analysis using the J-Curve (cites many
countries as examples, including Mexico):
http://faculty.econ.nwu.edu/faculty/christiano/362/w2003/lect12.pdf
East Asia analysis using the J-Curve
http://www.economicsbulletin.uiuc.edu/2003/volume5/EB-03E00003A.pdf
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3) Graphical Analysis:
Mexico: Inflation graph from PBS
http://www.pbs.org/wgbh/commandingheights/lo/countries/mx/mx_inf.html
Mexico: Trade Volume graph from PBS
http://www.pbs.org/wgbh/commandingheights/lo/countries/mx/mx_tvol.html
This article analyzes the Mexican devaluation crisis. It includes
graphical analysis:
Federal Reserve Bank of Dallas
"The Mexican Economy Since the Tequila Crisis," (Gruben, November, 2000)
www.dallasfed.org/research/indepth/2000/id0010.pdf
Plenty of graphical analysis of Mexico's trade indicators in this study of NAFTA:
Study on the Operation and Effect of the North American Free Trade Agreement
http://usinfo.org/trade/nafta/chap2_1.stm.html
Lots of graphs in this comparitive analysis of economics in Latin America:
Neoliberalism, Investment and Growth in Latin America
By Jayati Ghosh & C. P. Chandrasekhar
http://www.freeindiamedia.com/economy/12_jan_04_economy.htm
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Additional Resources:
Mexico: Economic Timeline from PBS
http://www.pbs.org/wgbh/commandingheights/lo/countries/mx/mx_economic.html
Trade Policy Timeline from PBS
http://www.pbs.org/wgbh/commandingheights/lo/countries/mx/mx_trade.html
NAFTA and after; Slouching towards the Free Trade Area of the Americas
by Peter Costantini
http://www.speakeasy.org/~peterc/nafta/nafta5.htm
The Case for Mexico's Rescue: The Peso Package Looks Even Better Now
http://www.foreignaffairs.org/19960501facomment4196/bradford-de-long-christopher-de-long-sherman-robinson/the-case-for-mexico-s-rescue-the-peso-package-looks-even-better-now.html
http://www.economist.com/countries/Argentina/
http://www.economist.com/countries/Mexico/
Thailand case study
http://www.ser.tcu.edu/2002/111-122%202002.pdf
Economics Links
http://teachers.ausd.net/socialsci/EconomicsLinks.html
Other answers that may be helpful:
International trade and economics
http://www.answers.google.com/answers/threadview?id=336657
international money and finance
http://www.answers.google.com/answers/threadview?id=344236
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Google Search Strategy:
devaluation effects, trade
-with narrowing terms
mexico
statistical
graph
J-Curve
Also used the econ-lit database.
Thank you again for your question. Please let me know if you need any
clarification of my response.
Regards,
Anthony (adiloren-ga) |
Clarification of Answer by
adiloren-ga
on
04 Jun 2004 15:07 PDT
Hi, I realize that I have thrown a lot at you and this may be a little
hard to process.
I found an article that may have everything that you require in a very
synthesized format. I have excerpted passages from the article below.
There are many graphs of Mexican and U.S. trade values that cover the
time of the devaluation and much statistical analysis of the role of
the devaluation and of NAFTA on trade between the U.S. and Mexico.
I also included a study specific to the 1994 devaluation with graphs
and statistical analysis that I think should be very useful. I hope
this helps.
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The article notes that the devaluation of the peso decreased U.S.
exports to Mexico and increased U.S. imports from Mexico:
http://www.cbo.gov/showdoc.cfm?index=4247&sequence=1
"# A sudden major decline in the value of the peso at the end of 1994
(which reduced U.S. exports to Mexico and increased U.S. imports from
Mexico),
# An associated harsh Mexican recession in 1995 (which lowered
Mexico's demand for all countries' exports, including those of the
United States)"
This is interesting- the U.S. trade balance with Mexico plunged around
the time of the Mexican devaluation:
http://www.cbo.gov/showdoc.cfm?index=4247&sequence=1
"A year after NAFTA went into effect, the U.S. trade balance with
Mexico dropped suddenly from near zero to a substantial deficit. It
recovered partially over the next few years but then began declining
again to record deficits. That decline has continued ever since."
"The balance of trade in goods with Mexico has declined substantially
since NAFTA went into effect. Its descent actually started almost two
years before NAFTA, but the balance did not decline much until a year
after the agreement went into force. It recovered slightly from 1995
through 1998 before resuming its descent."
The article argues that NAFTA did not cause the devaluation but that
the devaluation did effect trade (2 graphs are included to illustrate
this point):
http://www.cbo.gov/showdoc.cfm?index=4247&sequence=1
"Both were severe. From the last quarter of 1994 to the first quarter
of 1995, the real value of the peso (the value adjusted for inflation
in the United States and Mexico) dropped by one-third (see Summary
Figure 2). In the recession, seasonally adjusted real Mexican GDP
declined by 9.7 percent (see Summary Figure 3). Because of their
magnitudes, both of those events could be expected to have had a
substantial influence on trade. Their occurrence just a year after
NAFTA went into effect might lead some people to suspect that the
agreement played a role in causing them or making them worse. However,
that is not the case."
Causes of the devaluation:
http://www.cbo.gov/showdoc.cfm?index=4247&sequence=1
"A number of factors converged to cause the financial crisis that led
to the peso crash and Mexican recession of the mid-1990s. They include
the market's nervousness about the historically high real value of the
peso; considerable political turmoil in 1994 (an armed rebellion in
the state of Chiapas, a presidential election and change of
administration, two major political assassinations, and the
resignation of the Deputy Attorney General claiming a coverup in the
investigation of one of the assassinations); rising interest rates in
the United States; well-intended Mexican government policies that
ended up exacerbating the crisis; and the market's memories of past
Mexican government actions in somewhat similar situations that had
hurt investors.
In response to those factors, net foreign investment in Mexico
plummeted in 1994, causing interest rates to rise and putting severe
downward pressure on the value of the peso. The Mexican central bank
ran out of the foreign exchange reserves required to keep the peso
from falling and was forced first to devalue it and then to let it
float. Interest rates skyrocketed, the government and private sector
were unable to borrow from abroad, and the country went into a severe
recession."
The devaluation contributed to the increase in the trade defecit:
http://www.cbo.gov/showdoc.cfm?index=4247&sequence=1
"The reason for the substantial fall in the trade balance with Mexico
since NAFTA took effect lies primarily in fluctuations of the U.S. and
Mexican business cycles. The balance went abruptly into substantial
deficit at the end of 1994 and the beginning of 1995 because of the
severe Mexican recession and, to a much lesser extent, the peso crash.
The recession significantly reduced Mexican demand for U.S. exports,
and the peso crash further reduced that demand slightly and increased
U.S. imports from Mexico slightly."
NAFTA's effect on trade was minimal:
http://www.cbo.gov/showdoc.cfm?index=4247&sequence=1
"CBO estimates that roughly 85 percent of the increase in U.S. exports
of goods to Mexico between 1993 and 2001, and 91 percent of the
increase in U.S. imports of goods from Mexico over the same period,
would have taken place even if NAFTA had not been implemented. In
addition, the major fluctuations in exports and imports would have
been similar to what actually occurred."
U.S. Trade in Goods with Mexico (Graph)
(As a percentage of U.S. GDP)
1970-1998
http://www.cbo.gov/showdoc.cfm?index=4247&sequence=1
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Here is the other article- it really focuses of the economic
indicators related to the currency crisis:
OECD
The 1994 Mexican crisis: were signals inadequate? Pierre Beziz - Gérald Petit
http://www1.oecd.org/std/mexlipap.pdf
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