Credibility and consequences of economic reform: An institutionalist view of Mexico

This dissertation tests Douglass C. North's theory of institutional change with the economic reforms of Mexico in the late 1980s and 1990s. Relative prices and ideology are critical motivations for change; change is difficult because of the free rider problem; and the state or its agent, operating as a discriminating monopolist, is often the initiator of change. Credibility is the critical consideration, not necessarily the formal laws or rules.; Mexico undertook substantial change in the 1980s and 1990s, going beyond the macroeconomic crisis to reform the trade regime, including the North American Free Trade Agreement; pursue privatization; eliminate rules restricting foreign investment; undertake financial liberalization; enact education reform; establish new freedoms for churches; and establish central bank independence. Mexico was shifting from an economy and society in which government offered concessions to a society in which private choices and initiatives are encouraged by more, and certain, private property rights.; North's theory offers considerable insight into Mexico. Mexico was facing abrupt relative price changes, including a shift in macroeconomic priorities, which led to slower growth and higher inflation; an overvaluation of oil reserves, which prompted government deficits and borrowing that could not be serviced; capital flight; and a decline in Mexico's relative economic standing among the countries of the world, especially the Asian economies. The traditions of the president selecting his successor, the increasing role of técnicos in the political system, the importance of camarillas, life-long personal and professional ties within the PRI, and the power of presidencialísmo gave the president enormous ability to enact change.; The dissertation tests the credibility of financial reform, using an index of financial liberalization as a measure of institutional change. The study finds that institutional change in the financial sector was statistically significant in explaining (a) the growth of deposit bank assets; (b) credit extended to the private sector; (c) an increase in liquidity, measured as M4/GDP; and (d) a reduction of the risk premium assessed against the private sector in the short-term capital markets. Financial liberalization was credible and important.