Research Topics

The article analyzes Mexico under globalization, particularly on the free mobility of capital. It argues that globalization has detrimentally impacted the productive and external sectors, causing the economy to become excessively reliant on volatile capital inflows from abroad. The Mexican government—instead of undoing the structural problems that lead to external deficits—implements policies that resolve the short-term liquidity needs and go against economic growth, as if they are promoting capital inflows. The national currency has appreciated greatly and acts only in favor of the financial sector and in detriment of the productive and the external sector.
 
The Mexican economy has fallen into a context of high external vulnerability since it rests on capital inflows. Capital inflows are highly fragile and volatile. They depend not only on internal problems, but also on the world economy and expectations. For this reason, the reliance on capital inflows to appreciate the peso is unsustainable.
 
Given the meager growth of the world economy and trade, globalization is being questioned and various countries are implementing industrial and protectionist policies. If Mexico continues to bet on outward growth through nearshoring, it will have no chance of overcoming the problems it faces.
 
Mexico cannot continue with an economic policy that does not generate endogenous conditions to growth and that has made the economy dependent on the behavior of international financial markets which generate recurrent crises.

For Matías Vernengo and Esteban Pérez Caldentey (2020), the MMT literature overemphasizes the choice of the exchange rate regime and the relevance of a flexible exchange rate regime, as well as the ultimate effect of that choice upon the policy space. In addition, they argue that the role of capital flows is underexplored, and that the relevance of the balance-of-payments constraint is often underestimated. Vernengo and Pérez’s criticism fails to consider that exchange-rate flexibility makes it possible to use flexible fiscal and monetary policies as well, to boost growth and employment, and to reduce the balance-of-payments constraint.

This paper revisits a traditional theme in the literature on the political economy of development, namely how to redistribute rents from traditional exporters of natural resources toward capitalists in technology-intensive sectors with a higher potential for innovation and the creation of higher-productivity jobs. Porcile and Lima argue that this conflict has been reshaped in the past three decades by two major transformations in the international economy. The first is the acceleration of technical change and the key role governments play in supporting international competitiveness. This role provides the strategic public goods to foster innovation and the diffusion of technology (what Christopher Freeman called “technological infrastructure”). The second is the impact of financial globalization in limiting the ability of governments in the periphery to tax and/or issue debt to finance those public goods. Capital mobility allows exporters of natural resources to send their foreign exchange abroad to arbitrate between domestic and foreign assets, and to avoid taxation. Using a macroeconomic model for a small, open economy, the authors argue that in this more complex international context, the external constraint on output growth assumes different forms. They focus on two polar cases: the “pure financialization” case, in which legal and illegal capital flights prevent the government from financing the provision of strategic public goods; and the “trade deficit” case, in which private firms in the more technology-intensive sector cannot import the capital goods they need to expand industrial production.

China and India

The narrative as well as the analysis of global imbalances in the existing literature are incomplete without the part of the story that relates to the surge in capital flows experienced by the emerging economies. Such analysis disregards the implications of capital flows on their domestic economies, especially in terms of the “impossibility” of following a monetary policy that benefits domestic growth. It also fails to recognize the significance of uncertainty and changes in expectation as factors in the (precautionary) buildup of large official reserves. The consequences are many, and affect the fabric of growth and distribution in these economies. The recent experiences of China and India, with their deregulated financial sectors, bear this out.

Financial integration and free capital mobility, which are supposed to generate growth with stability (according to the “efficient markets” hypothesis), have not only failed to achieve their promises (especially in the advanced economies) but also forced the high-growth developing economies like India and China into a state of compliance, where domestic goals of stability and development are sacrificed in order to attain the globally sanctioned norm of free capital flows.

With the global financial crisis and the specter of recession haunting most advanced economies, the high-growth economies in Asia have drawn much less attention than they deserve. This oversight leaves the analysis incomplete, not only by missing an important link in the prevailing network of global trade and finance, but also by ignoring the structural changes in these developing economies—many of which are related to the pattern of financialization and turbulence in the advanced economies.