International Capital and Mexican Development: A System-Dynamics Model
The proper role of portfolio capital in the development process is currently the subject of vigorous debate among both scholars and policy makers. One of the core elements of the disagreement is whether or not unregulated financial markets represent a more efficient means of allocating capital (especially in terms of attracting funds to the capital-scarce third world) or if in fact they add unnecessary instability to already weak economies and tend to promote policies and outcomes detrimental to the poorest members of those societies. It is the latter view, as argued by institutionalists (and especially Ilene Grabel [1999, 1996a, 1996b, 1995a, 1995b]), that we shall examine here. The existing institutionalist research is primarily theoretical or descriptive. Our goal is to take these approaches to a new level by combining and formalizing their insights in a system dynamics model. In particular, we will highlight the impact of deregulated capital markets on income distribution in Mexico. Building such a model will not only allow us to present a more detailed and comprehensive view but also permit us to undertake some limited experiments by altering the historical inputs. This will, we hope, provide another avenue by which the current debate may be resolved. The paper is organized as follows. In the next section, a brief survey of the work of institutionalist authors in this area is offered. Next, system dynamics modeling is explained. Then the model is specified and some brief policy experiments are conducted. Conclusions follow.