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The Political Economy of Mexico's Entry to NAFTA

  • Aaron Tornell
  • Gerardo Esquivel

In this paper, we derive three lessons from Mexico's experience. First, deep reforms like trade liberalization are not likely to happen by government decree. Instead, they usually come about when the unanimous blocking of reform by powerful elites breaks down. In the case of Mexico, this happened during a fiscal crisis, when some groups tried to displace other groups in order to capture a greater share of fiscal revenue. Second, in the presence of entrenched elites, the sustainability of reform depends on the existence of new groups that benefit from the new status quo and have enough power to defend it. Thus, the speed of successful reform is determined by the speed with which new groups are consolidated. Initially, Mexico limited radical liberalization to the manufacturing sector. The government has only recently begun to undertake serious liberalization in the services and agriculture sectors. The third lesson we take from Mexico is that the importance of formal agreements like NAFTA lies not so much in the ability of these agreements to reduce average import tariffs among their parties and improve their terms of trade vis vis the rest of the world, as claimed by the optimal tariff literature, but in that they serve as commitment devices to force reforms to continue.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5322.

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Date of creation: Oct 1995
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Publication status: published as The Political Economy of Mexico's Entry into NAFTA , Aaron Tornell, Gerardo Esquivel Hernández. in Regionalism versus Multilateral Trade Arrangements, NBER-EASE Volume 6 , Ito and Krueger. 1997
Handle: RePEc:nbr:nberwo:5322
Note: ITI IFM
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  1. S Van Wijnbergen & Anthony J. Venables, 1993. "Location Choice," CEP Discussion Papers dp0177, Centre for Economic Performance, LSE.
  2. Steven Berry & Vittorio Grilli & F. Lopez-de-Silanes, 1992. "The Automobile Industry and The Mexico-Us Free Trade Agreement," NBER Working Papers 4152, National Bureau of Economic Research, Inc.
  3. Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1995. "The Collapse of the Mexican Peso: What Have We Learned?," NBER Working Papers 5142, National Bureau of Economic Research, Inc.
  4. Aaron Tornell, 1995. "Are Economic Crises Necessary for Trade Liberalization and Fiscal Reform? The Mexican Experience," NBER Chapters, in: Reform, Recovery, and Growth: Latin America and the Middle East, pages 53-76 National Bureau of Economic Research, Inc.
  5. Arturo Fernandez, 1995. "Deregulation as a Source of Growth in Mexico," NBER Chapters, in: Reform, Recovery, and Growth: Latin America and the Middle East, pages 311-342 National Bureau of Economic Research, Inc.
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