ABSTRACT

The reforms to the financial system were examples of successful state engineered changes that conformed to the dominant orthodoxy in economic thinking. However, in hindsight they were clearly insufficient to prevent the 1994 crisis and in some cases they even contributed to its generation. According to Martin Feldstein the structural cause of Mexico's 1994 crisis was a low rate of domestic savings; the economy was investing far more than it was saving. The crisis showed the imperfections of liberalised financial markets and their inability to secure stability. Electoral competition under President Salinas and end-of-sexenio business cycle reduced the capacity of the government to steer the economy the year prior the crisis. The 1994 crisis further changed the configuration of Mexico's financial system. Banks' weakening financial health forced the government to step in and avoid a major collapse of the system.