Mexico’s Fiscal Prudence Fails to Avert a Slowdown

Twice in the last three decades, Mexico has demonstrated that one country’s profligacy and mismanagement can spell economic catastrophe beyond its borders. In 1982, the country defaulted on its foreign debt and set off a Latin American debt crisis that led to a decade of anemic growth across the region. In 1994, the peso collapsed and halted capital flows to emerging markets around the world, until the Clinton administration arranged a $50 billion Mexican bailout. But this recession, it is the profligate United States pulling down fiscally disciplined Mexico, according to a The New York Times analysis. When the American economy began to spiral downward, officials here argued that Mexico’s hard-won macroeconomic stability would protect it. Now, as each week brings more bad news from the United States, those forecasts seem quaintly optimistic. To combat the crisis, recommendations are that governments shift their spending over to infrastructure projects that create jobs, subsidize employers not to lay off workers and offer temporary scholarships to poor families so that they do not pull their children out of school. Santiago Levy, a vice president at the Inter-American Development Bank in Washington, warns against any temptation to loosen the disciplined fiscal policies that Mexico and other developing countries have kept over the last years. Read more.