Mexico: Large, Immediate Negative Impact and Weak Medium-Term Growth Prospects
All of these sources of shock took a toll on domestic demand, and particularly on private consumption and gross fixed capital formation. Private consumption fell by more than 6 percent in 2009 relative to 2008, and fixed capital formation dropped by 10.1 percent. The total GDP loss during 2008–09, relative to Mexico’s potential GDP level, is estimated at close to 11 percentage points. Most of it is explained by a loss in TFP growth equivalent to 8.8 percent of GDP (table 8A.6). Policy Responses Although it is true that the magnitude of the crisis surprised almost everyone, the Mexican government clearly underestimated the situation in two crucial aspects: first, the scope of the crisis itself, which was initially perceived as relatively mild and confined mostly to the financial sector; and, second, its impact on the Mexican economy. The main reason the local authorities expected a limited impact on the Mexican economy was that the country’s financial sector was safe and sound as a result of the stricter regulation that was put in place during the restructuring of the financial sector following the 1995 crisis. According to the authorities, the fact that Mexico had been adhering to a strict fiscal discipline in recent years, that domestic inflation was relatively low, and that Mexico’s financial institutions were not engaged in the type of operations that had led to the collapse of several U.S. financial institutions, would be sufficient to make the Mexican economy relatively immune to the international crisis. The problem with this reasoning, however, was that the crisis was far from being only a financial one. It was also a crisis of the real sector of the economy and, as such, it was going to affect other economies through a multiplicity of channels. In the end, the intensity of the impact would depend, among other things, on the degree of economic integration with the U.S. economy. A faulty diagnostic explains the late and timid response of the Mexican authorities in confronting the crisis. On the fiscal policy front, the Mexican government announced in the spring of 2008 the creation of an infrastructure fund that was intended to have a countercyclical impact. Most of the resources in this fund were not new, however, coming from existing accounts that were dispersed across the different ministries. In addition, the government announced that several existing stabilization funds could be used if
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