Mexico's Balance of Payments Problem1) Investigate the causes of Mexico's Balance of Payments difficulties prior to the Peso devaluation. In the the years leading up to the 1994 crisis, Mexico made major economic policy changes in an effort to combat stagnation and rising inflation. The overall goal of their strategy was to restructure external debt, encourage foreign investing and lay the foundation for private sector led growth. In order to encourage trade and price stability the peso was pegged to the US dollar. Trade liberalization led to an increase in both exports and imports, as well as a huge upswing in capital inflow in the form of portfolio investment. Opening up its boarders allowed Mexico to increase economic growth as well as reduce inflation, but it left it self extremely vulnerable to changes in external forces. When the Peso was pegged to the US Dollar, it was set at a high relatively value, which increased the purchasing power of Mexican consumers. This lead to a sharp increase in imports primarily from the United States. As Mexico's trade deficit continued to rise, they were forced to pay for the increase in consumption by reducing domestic saving in