Mexico after the debt crisis : is growth sustainable? Oks, Daniel; van Wijnbergen, Sweder

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Oks, Daniel ; van Wijnbergen, Sweder
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The Journal of Development Economics
Debt relief - Mexico.; External debts -- Economic aspects; Capital movements -- Economic aspects
This paper argues that, in the case of Mexico's debt and debt service reduction agreed with London Club creditors, the 'smoothening' of the external transfer had a much stronger domestic impact than the reduction of debt/debt service per se. The financing of the expansion that ensued following the debt deal was facilitated by strong foreign capital inflows. However, along with the capital inflow, there was a sharp decline in private saving which raised concerns about the sustainability of the recovery. The paper argues that, even if domestic saving increases from the low level reached in 1992, the transition to a sustainable growth path is unlikely to be smooth, as the slowdown in consumption growth is likely to be contractionary. The net outcome will depend on how investment and net exports respond. The analysis of cyclical and structural factors of investment and net exports leads to a cautious optimism over the medium term.
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