The financing of economic growth and development: the case of Mexico

This thesis examines general and specific aspects of the financing of the Mexican economy during the 1960-1990 period from both internal and external sources. The thesis focuses on two fundamental questions, the first of which is the analysis of the interrelationship between financial variables and real variables of the economy in order to assess the scope of the financial liberalisation policy being currently implemented in Mexico. Secondly, the thesis examines the impact of foreign capital flows on the domestic economy and the extent to which the expansion of the economy is constrained by the balance of payments.

Following a general description of the Mexican economy presented in chapter one, which focuses on the evolution of financial variables and the financial policy implemented during the 1960-1990 period, chapter two analyses the theory of financial liberalisation, the hypothesis of which are tested for Mexico in chapters three and four. Chapter three examines the effects of financial variables, especially of real interest rates, on the level of total savings, financial savings, the level of investment, and economic growth. Chapter four takes into consideration the hypothesis that the allocation of resources through market forces under a liberalised financial system improves the productivity of investment. For this purpose, the chapter analyses the role of the financial sector under a liberalised environment and then attempts to measure the productivity of both private and public investment and examines the relationship between them.

The theoretical and empirical effects of foreign capital inflows on domestic savings, investment and economic growth are examined in chapter five; in this context, the chapter develops a model in which both the effects of inflows and outflows of foreign capital are considered in order to estimate the net effect of foreign borrowing on economic growth. Finally, chapter six finds that the long-run rate of growth of the Mexican economy is closely approximated by the balance of payments equilibrium growth rate. Conclusions to be drawn from this thesis are presented in chapter seven.