Credibility of trade policy reform and investment: the Mexican experience

Abstract

This paper assesses whether the program of trade liberalization undertaken by Mexico after 1985 was undermined by lack of credibility. It provides an empirical counterpart to some of the credibility issues that have been discussed elsewhere in the literature and proposes a methodology, based on the estimation of a probit model, to measure the probability of trade policy reversal due to the likelihood of occurrence of a balance of payments crisis. It is shown that the probability of trade policy reversal reduced indeed the rate of capital accumulation during the first years of the reform.