Financial Vulnerability in Mexico, Andrés Blancas Neria, 1st edition, Universidad Nacional Autónoma de México-Instituto de Investigaciones Económicas, Mexico, 2010.

The international crisis has revealed the many financial problems confronted by emerging economies. These problems in turn demonstrate that the financial opening does not prevent volatility or speculation, and to the contrary, transforms these phenomena into recurrent episodes in the economies that liberalized their credit systems in line with the provisions established by international financial entities. It is also important to remember that soon after these reforms were carried out, Mexico's crisis of 1994 exploded, extending through the second half of the 1990s and into the new millennium toward the emerging markets in southeast Asia and other economies in Latin America.

This work by Andrés Blancas Neria constitutes a vital contribution to a critical reading of the financial reforms applied in Mexico, and synthesizes a series of economic policy recommendations that in the current context of international crisis could assist in the urgently-needed economic reactivation.

The main objectives of this book are to explain the reasons for insolvency problems, lack of liquidity and volatility in Mexico, and to explain why problems associated with savings generation and allocation still persist despite reforms and greater financial deepening. The author also offers theoretical and technical analysis pointing to a fragile economy with overindebtedness that makes it vulnerable to external factors, and makes its reconstruction more difficult, given the constant financial collapses.

In the dominant economics literature, financial fragility is attributed to a lack of reforms that eliminate financial repression. However, the experiences of emerging economies imply the presence of diverse structural factors that necessarily involve political discussion and theoretical analysis that presents an alternative to neoclassic notions with monetarist inclinations. Therefore, the proposal made by Blancas Neria in the first chapter is to analyze the phenomenon of financial fragility, using the theoretical tools developed by Hyman Minsky, and engaging in debate from numerous perspectives that consider the crises as occasional events. The author's meticulous review demonstrates that Latin American crises do not constitute unforeseen events, but are rather a structural characteristic of their economic formation.

In order to explain the dynamics of Mexico's financial crisis, the author proposes an econometric model, using variables such as capital accumulation, profit and interest rates. Although the final diagnosis is correct, the transitory classification of what the author refers to as stages protected from Ponzi phases could generate debates and reactions, since on more than one occasion, he uses the term protected stages to refer to the precise moments in which free trade reforms were intensified and the overindebtedness phase of the national economy was especially noteworthy.

The second chapter contributes analysis on the experience of the transformation and restructuring of the financial system. Especially worth noting is the balance commented on by the author with regard to the achievements in monetary and financial terms during the stage referred to as stabilizing development, through the promotion of stable economic growth. In the proposal from Blancas Neria, however, economic policy instruments impede development of a more diversified and competitive financial system.

However, in the case of the author's evaluation of the trade and financial opening, the conclusions he reaches are severe. He states that such policies provoked a greater concentration of income, benefiting only a few wealthy families and deteriorating the living conditions of the great majority of households with medium and low income levels, in addition to marginalizing small and medium-sized establishments from formal financing structures.

These statements are demonstrated through a meticulous methodological exercise involving the use of mathematical tools based on a structure of social accounting and standard data matrices, conferring scientific rigor to the estimates applied to the financial institutions analyzed.

In the third chapter the author conducts an analysis of inter-institutional linking with the objective of demonstrating the problems in Mexico's financial system through two levels of analysis. The first problem identified is typical in underdeveloped countries and is identified as the presence of institutions that are financially unlinked from the rest of the economic system, signifying structural problems in terms of financial intermediation. The second problem is the behavior of financial institutions (identified by the author as key institutions), leading to positions characterized by financial risk and fragility.

The author's mathematical analysis for demonstrating what he refers to as the level of inter-institutional linking is synthesized and easily readable. Conclusions are classified by institution (central bank, commercial banks, development banks and other financial institutions), and consequently provide us with a broader panorama of the type of dynamics followed by each financial institution since the liberalization process. Together, the conclusions point to Mexico's financial fragility.

Given the changes in and behavior of investment funds not only in Mexico but also at the international level, further analysis of inter-institutional linking in this sector would permit greater understanding of the role played by pension systems as providers of forced savings, channeled to the private sector for acquiring assets in multiple high-risk occasions, clearly indicating the risks of a liberalized financial system.

In the last chapter, Blancas Neria presents his economic policy recommendations, which are in line with diverse academic and financial sectors that do not espouse the dominant theory. In summary, these recommendations propose greater growth in accumulation and profit rates, the promotion of financial intermediation, and oversight and supervision of financial system activities with the objective of discouraging speculation and episodes of fraud. The author also proposes greater coordination among fiscal and monetary authorities, with the main objective of an economic growth policy. This requires a different fiscal policy, based on progressive, comprehensive fiscal reform.

Even though the period studied in this book is only up to the mid-point of the first decade of this millennium, before the international financial crisis unleashed in 2008, it serves as a guide to understanding the financial reform process in Mexico that leads to financial fragility in the context of a situation of great instability and crisis in international markets. This book is therefore indispensable reading for scholars critical of the evolution of Mexico's financial system.

Alejandro López Bolaños
Institute of Economic Research, UNAM
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