Financial turmoil dots Mexico’s recent economic history. Between 1975 and 1995, the nation experienced recurrent currency, debt and banking crises with devastating effects on real economic activity.

      In Mexico, election years often heighten the risk of financial instability. Debt defaults or massive devaluations—or both—have accompanied three of the past five presidential elections.

      While the concerns may be understandable, Mexico has come a long way in recent years. The 2000 elections took place without financial repercussions, and this year the country isn’t nearly as vulnerable as it was prior to the 1994 Tequila Crisis. Mexico is by no means immune to crises; recent history tells us that few nations are. But Mexico has taken important steps to reduce the likelihood of another financial collapse, and the country appears well positioned to maintain economic stability through the election year.

Mexico’s turbulent history

      Two of the biggest financial blows to strike Mexico were the crises in 1982 and 1994. Both produced sharp contractions in per capita GDP. A brief review of Mexico’s recent economic history will help us understand how the troubles began and spread.

            High oil prices in the second half of the 1970s improved Mexico’s standing in international markets and helped fuel massive increases in government spending. The fiscal stimulus accompanied a surge in private spending facilitated by low, administered interest rates. The rise in domestic spending led to a deterioration in both the trade balance and government budget deficit and a rapid rise in inflation, putting pressure on ...

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