External Financial Fragility and Capital Flight in Mexico

Mexico suffered capital flight from 1973 up to 1988 practically without interruption. This paper attempts to evaluate the real cost to Mexico of capital flight. A simple macro-economic model is specified on whose basis an estimate of this cost is attempted. It is found that the cost of this capital flight has been enormous. It gave rise to over-indebtedness when financing was still available from external sources, and it entailed short- and long-term losses of output which the country might have generated. The loss of output was estimated at between 1.5% and 2.5% of the total GDP for the period 1973–1991, between 0.9% and 2% for the 1982–1991 period, and between 3.1% and 5.7% for the 1982–1988 adjustment period.