Medium-Term Prospects for the Mexican Economy

Some Modeling Results

by C. Richard Neu

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A simple model simulates developments in the Mexican economy over the next 20 years. When there is uncertainty, the model errs in the direction of optimism about Mexican prospects. A base case scenario illustrates that without a net inflow of foreign capital, the peso cannot be sustained at current real levels. This case also serves as a point of reference in assessing the effects of changes in other exogenous factors. A variety of positive factors creates an optimistic scenario that represents the best one might hope for over the medium-term future, one in which there is only a minor devaluation of the peso and no decline in real income. The model can also produce a pessimistic scenario that suggests the worst that might happen to the Mexican economy. The scenarios demonstrate that the Mexican economy is on something of a knife edge. Whether Mexico undergoes robust or slow growth will be determined largely by factors that only the Mexican government can affect directly. The U.S. government can provide technical assistance and encouragement, facilitate foreign capital inflows, and reduce barriers to imports of Mexican products.

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