Household Welfare in Mexico after the 1994 Financial Crisis

While the short-run impacts of a crisis on the welfare of individuals and their living standards is a well studied issue, we know rather little about the spatial and temporal dimensions of these impacts. The immediate welfare cost of a crisis can be high, but how quickly do individuals recover? Are the impacts greater for some than for others? If so, who are hit the hardest? And, do households recover as the economy does after a crisis? These are all important questions over which the current literature does not offer yet a definitive answer. The estimations made using the case of the 1994 Mexican financial crisis and the data contained in the Mexican National Income and Expenditures Surveys (ENIGH) made by the Mexican National Institute of Statistics, Geography and Informatics (INEGI) show that the impact of such a crisis was a dramatic deterioration of the welfare of the Mexican households in the immediate years after the crisis. On average, income and expenditure per capita fell by 23% in the immediate years after the crisis in comparison with its pre-crisis levels. Furthermore, by 2006 income and expenditure per capita was still below pre-crisis levels by a 1.5%. The results on the distributional effects of the crisis reveal that households located in rural areas, that don’t own their house, headed by males with lower levels of education and with a high number of unemployed members were hit the hardest by the 1994 Mexican financial crisis. Furthermore, the fact that it took them nearly 10 years to recover suggest that the most vulnerable households do not recover with the rest of the economy.