ABSTRACT

The debt crisis began in August of 1982 when Mexico experienced severe balance of payments problems which prevented it from servicing its foreign debt in accordance with originally agreed-upon terms. Before 1982 Mexican economic development was based on an import substitution strategy. Growth was attained by expanding the domestic market and covering balance of payments requirements through foreign borrowing and direct equity investment. When the availability of foreign financing fell dramatically, the consequent domestic macroeconomic problems had to be attacked immediately. Mexico was forced to reduce its aggregate demand below the level of domestic output in order to meet the sudden cut in foreign financing, the abrupt fall in oil export revenues and the service requirements on its foreign debt. Mexico has adjusted its trade balance to offset the fall in petroleum revenues and foreign financing by reducing domestic absorption.