Mexico Embargo Essay

In 1973, there was a World Oil Crisis. The OPAEC countries set an oil embargo for political reasons. When they lifted the embargo, the price of oil had risen from $3 per barrel to nearly $12. This greatly benefitted the Mexican economy as Mexico began producing more oil thus generating high revenue from oil exports. The Mexican government continued its expansionary fiscal policy using the oil revenue combined with large loans from foreign banks. However, the Mexican economy “heated up” too fast and by August 1982, Mexico found itself indebted to loans it could not pay back. As a solution to this, in the early and mid 80s, Mexico changed some of their economic reforms. This was because they had seen the extent to which Chile’s economy had

Mexico was spending more on imports than on exports because of the overvalued Peso. The overvalued Peso made Mexican exports expensive on the world market and made imports cheaper, especially since the import restrictions had been removed (and Mexico had joined NAFTA). Mexico had to buy Pesos on the World Market to keep the Pesos at its fixed exchange rate which ended up using up most of the Mexican Foreign Exchange Reserves. The Tequila Crisis therefore started when Mexico devalued the Peso in December 1994 in an attempt to turn the recession into a boom. Investors began removing their money out of Mexico because of political and economic concerns. Examples of the political concerns were that there was an uprising in Chiapas and the assassination of the presidential candidate Donaldo Colosio. The Mexican government further worsened the Crisis by issuing Tesobonos which is a “peso-denominated bond indexed to the US dollar.” The Tesobonos were good for investors but brought so much damage to the Mexican government as the repayment needed more pesos. The Tequila Crisis had a multiplying effect as it not only affected Mexico, but other Latin American countries as well such as Brazil and