Wednesday, November 18, 2009

Stiglitz on Mexico

The Nobel Prize-winning economist says that Mexico's recovery will be weak, and that it needs a fiscal plan that stimulates the economy. Stiglitz singled out Brazil and Australia as having responded well to the crisis, thank to strong governmental supports and timely adjustments to the banking industry. I'd actually like to hear a little more about exactly what Mexico should have done differently. The stimulus in Mexico probably wasn't strong enough nor was it pursued with enough gusto in Los Pinos, but that wouldn't seem to be a sufficient explanation for a 7 or 8 percent GDP contraction. The banking adjustments in Australia and Brazil aren't particularly helpful, because Mexico's banks weren't in danger. If Stiglitz could have personally designed and implemented the Mexican response with all the benefit of 20-20 hindsight, how much different would the past year have been, in GDP, job losses, peso strength, etc? Or put another way, how much of the horrible 2009 was an unavoidable effect of the crisis and the US recession, and how much of it stems from specific bad decisions from the Mexican government?

The above article doesn't include anything specifically critical or admiring of Mexico's response, so it's hard to say. Despite the conspicuous lack of finger-pointing, the article carries the following title: "Mexico didn't know how to combat the crisis: Stiglitz".

Noel Maurer, your opinion would be greatly appreciated.

Update: Some more detailed articles today have more info, including some more specific criticisms. The biggest ones are that the stimulus was too weak, and that Mexico should have directed more cash to infrastructure and educational spending.


Noel Maurer said...

I can't give a number, lacking an econometric model of the Mexican economy, but the country dug itself a hole.

The first problem came at the central bank, which panicked when Comercial Mexicana declared bankruptcy. They worried that a further drop in the peso might bankrupt too many Mexican corporations with hidden dollar liabilities. They also (with less justification) feared a jump in inflation. I won't second-guess that decision, because I assume that they had information that I don't. But if not ... well, the peso should have been allowed to fall to 20.

The second was that there wasn't much of a stimulus package at all. The government should have announced a big one, larger than half the federal budget, and shoved it out the door. If the bond market panicked, then they could reverse it: it's hard to imagine things getting much worse.

I don't understand Stiglitz's point about the banks, though.

pc said...

"But if not ... well, the peso should have been allowed to fall to 20.

That's a sentiment I think you hear and read a lot here, from a pretty wide spectrum of commentators.

Much obliged for the analysis.