Mexico - Trade Policy Project

Document or The World Bank FOR OvrCIcL USE ONLY Report No. P-4366-ME REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO USS500.0 MILLION TO BANCO NACIONAL DE COMERCIO EXTERIOR, S.N.C. WITH THE GUARANTEE OF UNITED MEXICAN STATES FOR A TRADE POLICY LOAN July 14, 1986 I This document has a restricted distribution and may be used by rcipients only in the performance of their oflicial duties. Its contents may not otherwise be disclosed without World Bank authorization.  Currency Unit - peso (Hex$) On July 10, 1986, the exchange rate in the controlled market was US$1 - Mex$S88.00; the freemarket exchaftge rate stood at US$1 - Mex$627.00. Fiscal Year January 1 - December 31 Weights and Measures I hectare (ha) - 10,000 square meters (m2) - 2.47 acres (a) 1 kilometer (km) - 0.62 mile (mi) 1 square kilometer (km2) - 0.39 square miles - 100 ha 1 kilogram (kg) - 2,205 pounds (lbs) 1,000 kilograms a1 metric ton Ct) - 0.98 long ton 1 liter (1) - 0.26 gallons (gal) Abbrevintion ACF Average Cost of Funds (see CPP for Spanish) BANCOMEXT Banco Nacional de Comercic Exterior, S.N.C. BdN Banco de Mexico [Central Bank) CEPROFI Certificado de Promocion Fiscal CETES Certificado de Tesoreria CPP Costo Promedio Porcentual (see ACF for English) DRC Domestic Resource Cost EFF Extended Fund Facility ERR Economic Rate of Return FICORCA Fideicomiso pars la Cobertura de Riesgos Cambiarios (Private sector external debt restructuring facility operated by the BdM) FRR Financial Rate of Return GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product GIRA General Interest Rate Agreement IMF International Monetary Fund NTBa Non-Tariff Barriers ORP Official Import Reference Price PEMEX Petroleos Yexicanos PRONAFICE Programa Nacional de Fomento Industrial y Comercio Exterior PVP Sistema de Pagos al Valor Presente QRa Quantitative Restrictions REER Real Effective Exchange Rate SECOFI Secretaria de Comercio y Fomento Industrial TPL Trade Policy Loan TFP Total Factor Productivy  FOR OFFCIL WE ONLY MEXICO TRADE POLICY LOAN Table of Contents Page LOAN SUMMARY v PART 1: THE ECONOMY UNTIL TMi CRISIS OF 1982 1 A. Introduction I B. Import-Substituting Industrialization, 1947-70 1 C. Public Expenditure-Led Growth, 1971-76 5 D. Growth through Oil and Foreign Borrowing, 1977-82 6 PART II: THE FIRST PHASE OF ADJUSTMENT, 1983-85 9 A. Exhaustion of Growth: 1983-85 9 B. Evaluation of the 1983-85 Policy Performance 14 C. The Start of General Trade Liberalization: 1985 17 PART III: TEE SECOND PHASE OF ADJUSTMENT, 1986-88 19 A. Medium-term Objectives 19 B. The Macropolicy Framework for 1986-88 19 C. Structural Policy Reforms 20 1. The Trade Liberalization Program: 1986-88 21 2. Other Structural Reforms 22 D. Social Impact of Trade Policy andl Trade Liberalization 27 E. The External Financing.Program for 1986-88 28 F. The Role of the Bank 29 C. The Role of the IKF 30 H. Creditworthiness 30 PART rV: THE PROPOSED LOAN 30 A. Loan History 30 B. Loan Objectives and the Trade Liberalization Programn 31 C. The Borrower 34 D. Disbursement 35 E. Procurement and Administration 35 F. Monitoring, Reporting, and Auditing 36 G. Collateral Studies and Technical Assistance 36 It. Project Benefits 37 1. Project Risks 38 PART V: BANK GROUP OPERATIONS IN MEXICO 39 A: Batik Operations 39 B. IFC Operations 40 C. Bank Strategy 40 PART VI: RECOMMENDATION 42 This document has a restricted distribudon and may be used by rmcipients only in the performance of their official duties Its content! may not otherwise be disclosed without World Bank authorization.  PRESIDENT'S SPORT - TRADE POLICY LOAN Table of Contenta Page TEXT FIGURES 1. Indicators of Public Sector Size 2 2. Mexican Non-Oil Exports 2 3. Ratio of Exports to GDP 3 4. Long-Term Trend in REER 3 5. Structure of Tax Revenues 5 6. Transfers and Subsidies 5 7. Inflation Trends 6 8. Overall Deficit As Percent of GDP 6 9. Ratio of N4 to GDP 7 10. Capital Flight 7 11. Share of Credit to Public Sector 7 12. External Public and Private Debt 7 13. Oil Reserves of Mexico 8 14. Oil Price Trend: Real and Nominal 8 15. Quantitative Restrictions Over Time 9 16. Ratio of Net Foreign Assets to Monetary Base 9 17. Non-Interest Public Sector Expenditures 11 18. Public and Private Fixed Investment 11 19. Real Wage Indices 11 2D. Public Sector Savings 11 21. Operational Deficit of Public Sector 11 22. Monetary Growth from Domestic Source 11 23. External Resource Balance 12 214. LongC-Te--2 Tren-d in Cnn Cro-th Rate 13 25. Real Per Capita Consumption 13 26. Domestic Debt and tRonetary Base 16 27. Fiscal Balance-By Currency 16 28. Public Sector Borrowing Requirements 16 29. Primary Deficit 16 30. Domestic Primary Deficit 16 31. Average Tariffs and Dispersions 18 32. Tariff Reduction Program, 1986-88 21 33. Exchange Rate Differentials 24 TEXT TABLES 1. Export/GDP Ratios 4 2. Total Net Subsidies 10 3. Shares of Production Under Quantitative Import Restrictions 32 4. Tariff Reduction Program - Chronogram for 1986-88 34 AS I. Country Data II. Status of Bank Group Operations III. Supplementary Project Data Sheet - ii -  PRESIDENT'S REPORT - TRADE POLICY LOAN Table of Contents ANNEXES (cont.) IV. Government's Statement of Foreign Trade Policy Tables: IV.1: Public Sector Financial Summary, 1985-88 IV.2; Balance of Payments, 1985-1988 V. Memorandum on Methodology VI. Fund Position as of March 31, 1986 VII. Evolution and Reform of the Trade Policy Regime VIII. Trade and Economic Statistics Tables: VIII.1: Effective Rates of Protection by Type of Economic Activity, 1960-80 VIII.2: Quantitative Restrictions on Imports, 1956-86 VIII.3: Dispersion of Protection in The Industrial Sector VIII.4: Evolution of Nominal Protection, 1983-85 VIII.5: Effective Rates of Protection in Selected Industries VIII.6: Ex Ante and Ex Post Tariff Averages and Percentage of Production Covered by QRs (1983 Production Weights) VIII.7: Relationship Between Tariff Changes and Nominal Protection Among Items Liberalized in July 1985 VIII.8: Effective Rates of Protection, 1985 VIII.9: Changes in Quantitative Restrictions, 1985 VIII.10: Structure of Quantitative Restrictions, 1984-86 VIII.11: Tariff and QR Indicators, 1984-85 VIII.12: Types of QRs, 1984-85 VIII.13: Tariff Average and Percentage of Production Under QRs VIII.14: Percentage of Production and Imports Under QRs, March 1986 VIII.15: Ex Ante And Ex Post Tariff Averages and Percentage of Imports Covered By QRs (1984 Import Weights) VIII.16: Distribution of Nominal And Effective Rates of Protection Among Economic Activities VIII.17: Controlled Import Items by Sector of Origin VIII.18: Changes in Structure of the Import Tariff during 1985 VIII.19: Impact of Official Prices on Nominal Protection VIII.20: Items with Official Prices VIII.21: Import Taxes, 1984-85 VIII.22: Classification of Industries by Extent of Liberalization, March 1986 VIII.23: Effective Rates of Protection in Selected Industries, 1960-80 VIII.24: Patterns of International Competitiveness by Industry, in Selected Industries, 1984 VIII.25: Patterns of Productivity Change In Selected Mexican Industries, 1972-82 VIII.26: Proven Oil Reserves VIII.27: Comparative Costs of Oil Production VIII.28: Structure of Controlled Exports VIII.29: Exports and Employment Generated, 1960-75 - iii -  PRESIDENT'S REPORT - TRADE POLICY LOAN Table of Conteats ANEXES (cont.) VIII. Trade and Economic Statistics (cont.) Tables: (cont.) VIII.30: Exports and Employment Generated, 1979-90 VIII.31: Labor Embodied in Export., 1970-90 VIII.323 Value of Extractive and Non-Extractiva Exports and the Appreciation of the Real Exchange Rate VII1.33: Mexican Contributions to the U.S. Labor Pool for Selected Years Figures: VII.I : Percentage of Production Under Quantitative Restrictions, by Sector, March 1986 VILI2: Percentage of Production Under Quantitative Restrictions by Type of Good, March 1986 - iv -  MEXICO TRADE POLICY LOAN Loan and Project Sum_ary Borrower: Banco Nacional de Comercio Exter ,or, S.N.C. Guarantor: United Mexican States ABONnt: US$500.0 million equivalent Terms: 15 years, including three years of grace, at the standard variable interest rate Project Description: The proposed loan would support the Government's long-term objective of gradually opening the Mexican economy through implementation of trade reforms, as a means of improving domes- tic efficiency and international competitiveness. The loan may be seen as part of a larger program of Bank financial and tech- nical support for Mexico's 1986-88 trade liberalization program, including one or two possible follow-up Trade Policy Loans (TPLs), a follow-up Export Development Project, and one or more possible industrial reconversion projects to assist both private and public sector firms in their adjustment to a more open trade policy environment. The proposed loan would also serve to assist Mexico in obtaining associated external financing from commercial banks and other sources. Specifically, this loan vould support the reduction of Non-Tariff Barriers (NTBa), which have historically constituted the heart of the Mexican system of protection and the simplification and reduced dispersion of tariffs. The loan would finance part of the additional imports resulting from the removal of NTBs. After an adjustment period which will include further import liberalization measures, additional non-oil export growth resulting from the trade policy reforms should more than compensate for the additional imports. The benefits of the program would be an improvement in the balance of payments, the gradual recovery of sustainable growth and employment based on productivity and efficiency gains, and the strengthening of external confidence and creditworthiness. Project Risks: A primary risk of the project relates to the danger of a macro policy framework inconsistent with a gradual and sustainable opening of the economy. A second major risk is the danger that NTBs will not be reduced sufficiently quickly to establish the full credibility of the three-year tariff reduction program. - v -  The existence of still pervasive NTIs could disturb the incen- tive effects of the tariff regime and weaken the inducement on the part of producers to adjust to a more economy-policy envi- ronment, Other risks relate to the length and difficulty of the adjustment process; domestic pressures against the conitinued implementation of the trade policy reform program; delays in implementing complementary reforms in areas such as agriculture, the parastatal sector, and the financial system; and uncertain- ties In the external environment. These risks are reduced by the Government's strong commitment to trade policy reform, as demonstrated by the significant reductions in quantitative import restrictions in 1985. Mexico's decision to seek GATT membership and to negotiate a new program with the IMF also reduces the risk of incomplete implementation of trade policy reforms or backsliding. There is also a risk that effectiveness of the loan may be delayed because of continuing uncertainty about the availability of sufficient net additional external financing for 1986 from other sources. Eatimated Disbursemeuts: The loan would be disbursed in two tranches. The first tranche of US$300 million would be available for disburse- ment at the time of loan effectiveness, including receipt by the Bank of satisfactory assurances that an appropriate financing package will be obtained from other lenders, including commercial banks and export credit agencies. The second tranche of US$189 million would be available upon fulfillment of conditions for second tranche release, which include the further reduction of NTBs by a minimum of 5% as measured by the coverage of domestic production. If the latter condition is not met by December 31, 1986, the second tranche will be cancelled, unless otherwise agreed between the Bank and Mexico. Disbursements of the entire loan, including US$3 million for technical studies and US$8 million for the establishment of a modern antidumping system, would be completed before November 30, 1988. Schedule of (Bank FY/USS Millions) Disbursements: '87 '88 '89 Annual 494 5 1 First and Second Tranche (489) (-) C-) Technical Studies (5) (5) Ci) Cumulative 494 499 500 Appraisal Report: This is a combined President's and Staff Appraisal Report. - vti -  REPORT MD RBECONENDATION OF TS PRSIDENT OF TEE IERD TO THE EECUTIVE DIR ORS 01 A PROPOSED LOAN TO BMCO NhCIONALDE CMODECW EXTERIOR, S.N.C. WITr lTHE WUARNTEE OF UNITED XXICAI STATES FOR A TRADE POLICY WAN 1. I submit the following report and recommendation on a proposed loan to Banco Nacional de Coinercio Exterior, S.N.C. (BANCOMEXT), with the guarantee of United Mexican States, for the equivalent of US$500 million, in support of the Government's program of trade policy reform. The loan would be repaid over 15 years, including 3 years of grace, at the standard variable interest rate. PART I - TS ECONOMY UNTIL TEe CRISIS 0 1982 2. An economic report, entitled "Mexico: Recent Economic Developments and Prospects," was issued May 7, 1984 (4996-ME). A new Country Economic Memoran- dum is scheduled to be issued by August 1986. Country data are provided in Annex I. A. INTRODUCTION 3. The growth performance of Mexico over the three decades after 1950 is among the best in the Western Hemisphere, at an annual average GDP growth rate of 6.4%. But these averages obscure the Increasingly costly and unsustainable growth strategies pursued and the rising instability of the Mexican economy over the period. Shortly after World War II, Mexico adopted an import-substi- tution strategy to industrialize a largely rural economy. Between 1940 and 1970, agriculture's share in the economy fell from 212 to 11%, while industry's grew from 25% to 34%. Protection of new i1tdustries was intended to be tempo- rary, but instead protection continually inc:eased and left the Mexican economy unable to compete in world trade. The loris of competitiveness was further aggravated after the oil boom of the 1970s. B DIFOIT-SUBSTITJTINC INDUSTEIALIZAIION, 1947-70 4. During nearly two decades, between 1947 and the mid-1960s, increasingly protected domestic markets provided a stimulus to private sector investment and growth. The public sector retained a relatively modest share in economic activity--on average about 15% of GDP (Figure 1)--awarding diverse incentives. usually on a discretionary basis, to private investment. Through high Import tariffs and a complex system of import licensing, domestic Industry was protected from competition from imports--theoretically as a "temporary" support for "infant industries," although in practice indefinitely. Monetary and ex- change rate stability further supported financial deepening and growth. 5. By the late 1960s, the relatively easy and efficient opportunities for import substitution had been exhausted. With the rising anti-export bias ema- nating from the trade regime, Mexico's share in world exports had declined  - 2 - steadily from 0.9Z in 1948-50 to 0.5% by 1968-70 (Figure 2). With seports declining rapidly as a share of GDP (Figure 3), preferential imports of needed capital goods and raw materials generated chronic trade deficits. The bias in favor of local manufacturing was compounded by the provision of cheap capital imports, cheap energy, and other public utility inputs. These policies were heavily biased against labor and labor-intensive sectors, in a country whose population was growing at an annual rate of over 32 during the 1960s and where a large proportion of people was (and is) living in poverty. Increasing unemployment, formal or unrecorded, was one result; very low wages for non-governmental and non-union labor, another; and large-scale outmigration, yet another. Figure 1 Figure 2 INDICATORS OF PUBLIC SECTOR SIZE MEXICAN NONOIL EXPORTS AM MFEPf Or P p0 A ruvw'# ar WOMB inm M. is. 0a. In: 4 _ la'' 13 .6 so ',i7 t X7 4 n't Z 1" J* 4" " * 70 7X 4 -ZMY D"A 6o. Mexico faced a strategic policy choice in the late 1960s between movlng to an internationally-competitive growth path, or deepening its commitment to inward-oriented development. A gradual opening of the economy would at that tilme have been possible at limited cost because import substitution had been focussed primarily on consumer goods, In which Mexico could have readily achieved international competitiveness. But Mexico's import-substituting pri- vate sector (including foreign-owned Eirms producing for the domestic market) refused to be deprived of lts captive domestic market. arguing successfully that reduction of protectionlot barriers would destroy local lndustry. A large Government bureaucracy similarly opposed the elimination of discretionary con- trols on foreign trade. Mexico twice--in 1971-72 and again in 1977-78-- attempted and then reversed trade llberalizatlon programs. For the 15 years from 1970 to 1985, Mexico thus postponed needed structural reforms and opted instead for a deepening of its protectionist and inward-looking development path. 7. With an untenable external trade imbalance and no productivity growth after 1970, the maintenance of an gnward-oroented dncentive regite foremlosed opportunities for sustainable growth ant employment based on comparative advan- tage and international tracet Protected smport-substitutm on was ubs tensiin ed  - I - and extended down the chain of production to many Intermediate and capital goods, for which Mexico did not have the domestic market scale necessary to achieve efficient productlon without exporting. Mexico conceived of Itself Am one of the largest economies in the developing world, ignoring the fact that, in terms of effective purchasing power, its internal market was no larger than that of London or Los Angeles. Mexico's effective market size for non-petro- leum-related industrial products 1s less than one-tenth of that of countries such as France or Germany, which rely on International specialliation to ensure efficient production; yet Mexico progressively Isolated itself from world markets, with non-oil exports declining steadily to less than 32 of CDP by 1980 (Figure 3). This is one of the lowest export-GDP ratios of any economy in the world--lndustrialized or developing (Table 1)--and It made the Mexican economy unusually vulnerable to external sector shocks. Figure 3 RATIO OF EXPORTS TO CDP ~~~Figure 4 RATIO Or EXPORTSi TO COP LONC TERM TREND IN REER S. PWCSSTfl~ ~ ~ ~ ~ ~ ~~~MUPWA 17- O '0~~~~~~~~~~~~~~~~~~~~0 W 4'a is l'O as _4~~~~i a ioS p BtD . . 4 Ca. EXP a KMLF IMP MAL O7M70tR EWra^seONz_Z RAM o aw * a * S lw C 8. In the absence of productivity gains since the late 1960's, growth since 1970 has been contrived, first via public expenditure-led growth (1971-76), financed largely through foreign borrowing, and subsequently (1978-82) via booming oil revenues and additional foreign borrowing, made possible by the prospect of future income from oil. By the time both of these options had been exhausted, Mexico by the mid-1980. faced an external imbalance touch greater than that of 1970, an incentive regime much more severely distorted, and an economy even less able to compete internationally. The recent collapse in world oil prices now creates an imperative for Mexico to move forward urgently with the structural reforms that have been postponed since the late 1960a. These reforms are dictated not primarily by the fall in oil prices--because Mexico can continue to produce oil profitably at prices even below those cur- rently prevailing in world markets (about US$12-$14 per barrel) nor are they dictated by Mexico's need to service the interest on its foreign debt, which continues to be payable in its entirety out of net PEMEX export revetiues alone (thus leaving the net balance approximately unchanged vis-a-vis the payments situation prior to the surge in foreign borrowing after the late 1970s). Rather, they are dictated by the need to recover productivity growth and employment.  - 4 - T6le 1: CO - A XV9 w inOE MMa mAM u (XAi) IMiK (1980-81) n-on -m mAu AUrA LAm AN- No=n mm Belgiwn 62.00 Szil. 64.50 Malaysia 57.00 Venezuela 67.40 Jordan 50.90 Irelard 49.00 Liberia 64.50 KTrea 35.00 Jmica 49.30 Israd 45.60 Norway 47.50 Come 57.10 Indones. 32.50 Paum 43.00 Tunisia 41.00 Austria 37.60 Gabon 53.80 Sri Lan. 31.30 HDiduras 35.10 Algeria 34.90 Switzer. 37.00 Botswana 50.60 Ihailand 24.10 Costa Rica 34.90 Egypt 30.60 Denark 34.60 MaLrit. 47.90 Pakistan 12.40 El Salvador 30.10 Morocco 20.00 Finland 33.20 Togo 38.30 Burma 8.10 Ecuador 23 AO Syria 16.20 SRnden 29.90 Zaire 35.30 India 7.0 Pezu 23.30 New Z. 28.50 Zawbia 35.00 Domin.Rep. 20.00 Canada 28.10 vory C. 34.10 Chile 19.60 U.K. 27.10 Zimbabwe 27.70 Guatenala 19.60 Italy 23.60 Kenya 27.10 Bolivia 18.10 France 21.60 Nigeria 26.70 Colombia 14.00 Aiwtr. 16A0 .amRp1 26.10 /MAdo (otIal) 12.20/ Spain 1640 Malawi 25.30 Brail 8.70 Japan 16.00 Cwmnroon 24.70 Araentina 8.20 U.SA. 1D00D MIKr 24.10 /Meico (oN-Oil) 3.50/ Leaotlo 18.10 Ethiopia 12.60 Tanzania 12.20 FwEda 12.20 Ghana 5.80 Source: International Financial Statistics, DMF.  9. Fortunately, Mexico has a record of remarkable export responsiveness whenever exchange rate and other policies have been appropriate. For example, between 1970 and 1973, manufactured exports (including net exports of the in- bond sector) increased from US$444 million to US$1,313 million--a real annual growth of 34%. Again, between 1976 and 1979, overall manufactured exports increased from US$2.0 billion to US$3.4 billion, for a real annual growth rate of 8%. Most recently, in the period 1982-1985, overall manufactured exports rose from US$3.9 billion to US$6.4 billion, despite some decline in 1985, for an average annual growth rate of 15% in real terms. Moreover, the in-bond sector--which benefits from a relatively unencumbered free-trade status--has had an impressive growth performance over the years, despite increasing insta- bility oE exchange rate and other policies. Between 1970 and 1982, net exports of the in-bond sector alone rose from US$83 million to US$851 million, and since 1982 these have risen by a further 55% to US$1.3 billion. Employment in the in-bond sector has grown rapidly since 1982, far outstripping the overall rate of employment growth in the economy as a whole. In response to the large real devaluation of the Mexican peso since mid-1985 (Figure 4), non-oil exports are again booming, up by 20% in real terms during the first four months of 1986 over the like period of 1985. C. PUBLIC EZPENDITURE-LED GROWTH, 1971-1976 10. Protect.on from foreign competition and the confinement of production primarily to domestic markets, not only prevented industry from gaining in pro- ductivity and the efficiency to compete abroad, but also penalized the primary sectors (especially agriculture and mining) that had previously been export- oriented, by skewing incentives and drawing private sectur resources away from these sectors. Virtually all sectors became increasingly dependent on fiscal incentives, subsidized input prices, preferential credit, and "buy Mexico" procurement policies of the public sector. By 1970, federal non-oil taxes accounted for an extremely low 7.6% of GDP (Figure 5), while subsidies and transfer payments alone accounted for about 5% of GDP (Figure 6). But the private sector also resisted efforts to strengthen Government finances and to increase taxes and social expenditures to provide for a rapidly growing population. Figure 5 Figure 6 STRUCTURE OF TAX REVENUES TRANSFERS AND SUBSIDIES (AS PEPMEW Or aDPI U "WlT Wr M 12 -~~~~~~~~~~~~~~~~~~~~1 Ma7 a 01 77 4n0 7 7- aJ47 177 77s 1 24^ 3a 7 -~~~~~~~~~~~~~~9I a eo e ao na7 7 67 7 3S 71.1mama arn are7 a era ri 72 7.3741 7.' 76777 79600616 ea m ana mm a COL. T&Xfl 4. NOOEL TAX a WaLE PDodE 1UPhIC  - 6 - 11. By 1971-72, both trade and tax reform initiatLves had failed, and the Government embarked on a rapid expansion of public sector expenditure to ensure continued economic growth and employment. The number of companies with Govern- ment participatlon more than doubled, to 845, between 1970 and 1976. Parastat- al enterprises expanded faster than the economy at large, relying increasingly on transfers from the Federal Government budget. 12. After years in which inflation in Mexico had closely followed trends in world inflation, expansionary spending policies initiated a process of rising inflation (Figure 7). By 1975-76, the consolidated public sector deficit had reached nearly 10% of GDP (Figure 8), and inflation was in excess of 15%. Financial deepening was reversed (Figure 9), and capital flight ensued (Figure 10). Crowding out of the private sector in the domestic credit markets intensified (Figure 11), despite the financing of the balance of payments through rapidly growing foreign borrowing by the public sector (Figure 12). The share of the public sector in GDP, which had remained below 20% prior to 1970, rose to 28% by 1976 (Figure 1). Figure 7 Figure 8 INFLATION TRENDS OVERALL DEFICIT AS % OF GOP AML CrNdO P M gsm-10o gI 10 . 12: *0 3 0 - 1A 10 ~~~2. AC - ' 7... 6 13. Basic incentive-regime distortions that were present before 1970 were exacerbated by inflationary policies, an overvalued exchange rate, and negative interest rates. Quantitative restrictions vere raised back to record new lev- els (Figure 15). Mexico tbus incurred the combined effects of a long misdirec- ted growth strategy and increasingly inappropriate macropolicy. The economy's long period of stab:lity and private sector confidence were undermined. Real economic growth averaged 6.2X over the period 1970-76, but it was contrived in an inward-oriented economy on the strength of an unsustainable rise in public expenditure and foreign debt. D. GROWTH THROUGH OIL AND FOREIGN BORRnWILMGw 1977-1982 14. Following the 1976 crisis, the Government undertook a combined program of stabilization and trade liberalization. There was a first phase to disman- tle import controls by 1980, to be followed by a gradual lowering of tariffs.  JAM Mvid 0 AIa :rinii a 3amuia aMowlnw4m Am 1 A-wnI nown * + , t^r;,zoJs "~~~~~~~~~~~~~~~~~~~~o 09 F E~~~~O dO JNw US M02 1U~O WcL dO AtI U o w r : xceqDz. z,r2z.6 ".!!>w Cc 3 N I f 1 S ii~~~~~~~~0 'a SI~~~~~~~~~~~~~~~~~~C lH Tl OlnlYOdD 1Tab 0 01'&M'WAWD ainS 6 a *V eV to I a co at. RA Ill/ 04 VL rL tL u 4m ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~e a II~~~~~~~~~~~~~~~~~~~~~~~I LHI1 V.LIdVo O 0