Thursday, August 06, 2009

U.S.-Centric Economic Strategy Presents Obstacles for Mexico amid Recession

Sources: Mexico recession shows downside of close U.S. links

As Mexico struggles to recover from one of the most severe recessions in its history, the drawbacks of the country’s dependence on U.S. consumers are laid bare. This year, the Mexican economy is expected to diminish at least 6.5 percent, its greatest reduction since the Great Depression and one of the most severe in Latin America as a whole.

Mexico’s single-market development strategy, as well as its failure to pursue broad-based economic progress through investments in education and infrastructure, produced the weakness in the economy. Large Asian economies such as China, India, and Korea—the growth rates of which have significantly exceeded those encountered in Latin America—have enjoyed the benefits of an emphasis on jobs and education.

The North American Free Trade Agreement, or NAFTA, which became effective in 1994, firmly established Mexico’s one-sided economic strategy. The commercial agreement did not give rise to the sort of explosive growth fitting an emerging economic steam engine, though it produced a quantity of factory jobs in the north. While Chile and Brazil, which are less reliant on the U.S. consumer, have experienced rapid growth, such development continues to evade Mexico’s grasp. Over the last ten years, the United States’ restrained 1.8 growth rate even exceeded Mexico’s percent rate.

Due to Mexico’s dependence on exports to the U.S., its growth rate falls on the shoulders of U.S. consumers. While data released on Friday about the U.S. gross domestic product revealed that the speed of contraction has slowed greatly, it also informed on a reduction in consumer spending. The Federal Reserve, the central bank of the U.S., has also indicated that the U.S. economy will not reach its former “potential” growth rate for five or six more years.

Discussion Questions:
1) What steps can Mexico take to improve its growth rate while consumer spending remains low in the United States?
2) How can Mexico guard against future international financial earthquakes?

Monday, August 03, 2009

Reformed IMF lending policies address the needs of low-income countries

Reuters Africa: IMF to boost funds, revamps lending to poor nations
IMF: The IMF Response to the Global Crisis: Meeting the Needs of Low-Income Countries

For the world’s industrialized economies, the worst of the global financial crisis seems to be over. G8 leaders are contemplating recovery strategies, trying to rein in inflation and hoping to reduce the overall severity of the recession. In low-income countries however, the global economic downturn, along with rising food and fuel prices, threatens to erase years of economic progress.

On July 29, the IMF announced a series of new lending policies to combat the effects of the recession in low-income countries. By adopting the new measures, the Fund has “transformed its relations with low-income countries,” and responded directly to an emerging international consensus on how best to respond to global crisis.

The IMF plans to increase concessional lending to low-income countries to $17 billion by 2014. The increased funding will be accompanied by more generous borrowing limits and by new, flexible concessional financing facilities. For example, the new Standby Credit Facility will address short term needs by allowing countries to tap the IMF specifically when they need funding, rather than in the course of an established IMF program. The Fund also plans to place a strong emphasis on poverty alleviation and growth, implementing programs to protect social and other priority spending. The Fund also plans to freeze interest rate payments on outstanding credit for 60 low-income countries over the next two and a half years, until 2011.

Already, in the first six months of 2009, the IMF has lent or committed about $3 billion, more than in the past three years combined. Their new commitment will increase overall lending to four times historical levels and represents an unprecedented transformation of the IMF’s lending policies.

1. The IMF is overhauling its lending policies to meet an immense need. However some of those policies were established as safeguards against problematic lending to already debt-burdened countries. What are the potential costs of these new, flexible lending practices?
2. How can the Fund effectively monitor poverty-alleviation spending? Will other member countries be more willing to subsidize low-cost lending if the IMF is able to scrutinize loan spending?