Economic Report of the President 1994 - The American Presidency ...

Box 6-3.—Mexican Economic ReformsMexico is one of the outstanding economic success stories ofthe last decade. After the debt crisis of 1982, the Mexican governmentbegan a broad program of economic reform, which hascontinued through the early 1990s. Fiscal policy changes,which moved the primary budget (that is, excluding interestpayments) from a deficit of about 7 percent of GDP in 1982 toa sustained surplus, were the first step. More-fundamental reformbegan in December 1987 when the Mexican governmentimplemented a concerted program that combined macroeconomicstabilization with microeconomic liberalization.Stabilization efforts in 1989-91 were pursued through a fiscalpolicy of tight spending controls and tax reform that broadenedthe tax base and lowered tax rates, while maintaining aroughly stable level of revenue. Monetary and exchange-ratepolicies were combined to reduce inflation while preventinglarge exchange-rate movements. Finally, incomes policies wereused to reduce expectations of inflation and any inflationaryinertia.The microeconomic reforms were sweeping. More than 80percent of the 1,155 public sector enterprises in existence in1982 have already been privatized or liquidated. Privatizationhas enhanced microeconomic efficiency and reduced the fiscaldemands imposed by badly run state-owned enterprises. In addition,Mexico joined GATT in 1986. Tariffs were cut sharplyand many nontariff barriers to trade, such as quotas and importlicenses, were removed. Finally, a renegotiation and restructuringof Mexico's external debt eased its debt burden andgreatly reduced the uncertainty associated with debt service.The results of these reforms have been impressive. Inflationfell from approximately 160 percent in 1987 to 12 percent in1992. At the same time, real GDP growth rose from -3.8 percentin 1986 to 4.5 percent in 1990 before slowing somewhatto 2.6 percent in 1992. The recent passage of NAFTA shouldstrengthen the reform effort in Mexico and make a positivecontribution to its economic performance in the future.NAFTA and Industrial Trade. As a result of NAFTA, existing dutieson most goods from member countries either were eliminatedon January 1, 1994, or will be phased out in 5 or 10 years (for certainsensitive items, up to 15 years). Among those industrial goodsfor which trade is now tariff-free are computers, medical equipment,agricultural equipment, internal combustion engines, andtelephone switches, all of which previously faced tariffs of 10 per-226