The North American Free Trade Agreement (NAFTA) has had a profound impact on Mexico's economy and institutions. Mexico's tax reform should be guided not by NAFTA considerations, however, but by the objectives of higher revenues and a simpler, more efficient, and more equitable tax system.

September 2001The North American Free Trade Agreement (NAFTA) has had a profound impact on Mexico's economy and institutions. Mexico's tax reform should be guided not by NAFTA considerations, however, but by the objectives of higher revenues and a simpler, more efficient, and more equitable tax system.The North American Free Trade Agreement (NAFTA) has had a profound impact on Mexico's economy and institutions. Clearly, no consideration of tax reform can ignore its role. The thinking about tax reform in Mexico requires evaluating NAFTA's effect on Mexico's economy, including its tax structure, and the effect of its tax system on trade and capital flows between Mexico and its NAFTA partners, the United States and Canada.Martinez-Vazquez and Chen review the evidence on NAFTA's economic effects, focusing on the changes in foreign trade and foreign direct investment flows in Mexico and the effects of these changes on Mexico's tax base and ability to raise tax revenues. Using marginal effective tax rate analysis, the authors also compare Mexico's tax system with those of Canada and the United States in terms of the effect on foreign direct investment.Martinez-Vazquez and Chen draw two main conclusions from their analysis. First, by fueling Mexico's exports and foreign direct investment inflows, NAFTA has altered the country's economic structure and hence the industrial distribution of the tax base. This transformation calls for adapting the tax structure to an economy oriented toward services and manufacturing exports. And second, Mexico's membership in NAFTA provides no significant reasons for fundamental change in its tax structure. The new wave of tax reform should concentrate on raising revenues, simplifying the tax structure, and increasing the efficiency and overall equity of the tax system.This paper - a product of Mexico-Anchor, Latin America and the Caribbean Region - is part of a larger effort in the region to foster research in economic development and public finance. The authors may be contacted at [email protected] or [email protected].

Analyzing the experience of Mexico under the North American Free Trade Agreement (NAFTA), 'Lessons from NAFTA' aims to provide guidance to Latin American and Caribbean countries considering free trade agreements with the United States. The authors conclude that the treaty raised external trade and foreign investment inflows and had a modest effect on Mexico's average income per person. It is likely that the treaty also helped achieve a modest reduction in poverty and an improvement in job quality. This book will be of interest to scholars and policymakers interested in international trade and development.

Instead of focusing the debate about the conduct of monetary policy on whether the nominal exchange rate should be fixed or flexible, the focus should be on whether the monetary policy regime appropriately constrains discretion in monetary policymaking. Three frameworks deserve serious discussion as possible long-run strategies for monetary policy in Latin America. A hard exchange-rate peg, monetary targeting, and inflation targeting.

In recent years we have seen a growing number of banking and financial crises in emerging market countries, with great costs to their economies. But we now have a much better understanding of why these crises occur and a better idea how they can be prevented.