Foreign investment, democracy and the 1994 Mexican crisis

Abstract

The main objective of this article is assessing the effects of foreign capital in flows on macroeconomic policy making and/or democracy. The case of Mexico is particularly interesting in this respect for two reasons: First, it captured from 1990 to 1993 more foreign flows than any other developing country, 52.8 billion dollars. It was followed by China with 49.2 billions and Argentina with 24.5. A significant percentage of this was portfolio investment, which made capital flows particularly sensitive to any event that could impact short term profits. This enormous flow was possible thanks to a process of economic reform that was perceived as creating the basis for long term growth and a liberalization of the financial markets that helped financing some modest growth.