Working Paper: NBER ID: w10289
Authors: Aaron Tornell; Frank Westermann; Lorenza Martinez
Abstract: Mexico, a prominent liberalizer, failed to attain stellar gross domestic product (GDP) growth in the 1990s, and since 2001 its GDP and exports have stagnated. In this paper we argue that the lack of spectacular growth in Mexico cannot be blamed on either the North American Free Trade Agreement (NAFTA) or the other reforms that were implemented, but on the lack of further judicial and structural reform after 1995. In fact, the benefits of liberalization can be seen in the extraordinary growth of exports and foreign domestic investment (FDI). The key to the Mexican puzzle lies in Mexico's response to crisis: a deterioration in contract enforceability and an increase in nonperforming loans. As a result, the credit crunch in Mexico has been far deeper and far more protracted than in the typical developing country. The credit crunch has hit the nontradables sector especially hard and has generated bottlenecks, which have blocked growth in the tradables sector and have contributed to the recent fall in exports.
Keywords: NAFTA; Mexico; Economic Performance; Liberalization; Credit Crunch
JEL Codes: E20; E44; F30; F43; G15; O40; O50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lack of judicial and structural reforms after 1995 (P37) | deterioration in contract enforceability (D86) |
| deterioration in contract enforceability (D86) | credit crunch (E51) |
| credit crunch (E51) | economic performance (P17) |
| credit crunch disproportionately affects nontradables sector (F65) | bottlenecks that hindered growth (O11) |
| credit-to-GDP ratio fell significantly (F65) | deeper and more protracted credit crunch (E51) |
| asymmetrical impact of credit crunch on nontradables and tradables sectors (F65) | observed economic phenomena (E39) |
| decline in nontradables sector's output (F66) | implications for overall economic growth (F62) |