Did the Global Capital Markets Fail Mexico?
If the Mexican economy had not been overly dependent on investments from the United States, it might have saved itself from crashing when the U. S. economy went through dramatic changes. Then again, Mexico was not adept at marketing its investments in any case. Perfect markets rely on perfect information while imperfect information is a form of market failure. Of course, Mexico had not provided sufficient information about long-term investment to American investors. As the example of the United States’ current account deficit reveals, Mexico was not hurt by its current account deficit alone.
Rather, the country should have worked to perfect its market for long-term investments to save itself from the crash. In fact, Mexico is entitled to long-term investments from countries besides the United States, too, if it seeks to provide perfect information to foreign investors. With the advent of the Internet, this has become relatively simple. It was not the global capital markets that failed Mexico. Rather, Mexico failed itself. One of the reasons for investors pulling out their capital from Mexico was political upheaval in the country.
Mexico did not only need to provide perfect information about long-term investments to foreign investors, but also knowledge about managing the political risks faced by investors at the time. Hedging is a way to manage such political risks. As an example, a foreign investor may obtain insurance from the Multilateral Investment Guarantee Agency of the World Bank. The insurance may provide covers against civil disturbance, war, expropriation, in addition to currency transfers.
National insurance companies – run by the government – may similarly be approached by a foreign investor to obtain cover for risks that arise from non-payment (Frenkel, Karmann, & Scholtens, 2004, p. 20). The Mexican government should have promoted such insurance companies at the time. In fact, information about hedging as a political risk management tool should have been considered a part of perfect information for a perfect market of investments. What is more, perfecting a market thus should have been considered a major step toward further development of Mexico.