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Fiscal Incentives, Maquiladoras, and Local Standard of Living in Mexico Before and after NAFTA

Author: JULIO HUATO
Published in PFM, Vol. 10 No. 3

This work finds that maquiladora activity exerts no robust net influence on various nonincome measures of standard of living in Mexico: literacy rate, school enrollment rates, basic housing amenities, life expectancy, infant mortality, and an overall index of human development. The maquiladora program, an array of tax benefits designed to foster foreign-owned in-bond for-export manufacturing plants, introduced in Mexico in the 1960s, experienced a remarkable expansion in the late 1990s. In the early 1990s, the program was used as a prototype of the fiscal incentives necessary to attract foreign investment, considered necessary to promote social development. Legislative changes and NAFTA provisions were modeled after it. Although small, the main data set is supplemented to control for the effects of non-maquiladora economic activity and prior growth. To account for possible endogeneity, maquiladora activity is instrumented with a measure of road transportation time to the nearest major border city in the United States. Robust OLS, IV-TSLS, and IV-GLS regressions are used to estimate the effects.

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