19 falls at all in 1989 (down to 11.9% from 12.1 percenL of GDP in 1988). After that a strong recovery follows as the tax credit reaches its full impact. Private investment reaches a peak of 14.1 percent of GDP in 1992 after which it tapers off slightly as the declining value of the tax credit more than offsets the impact of falling real interest rates. The end result is still a respectable 13.5 percent of GDP by 1994.

Since public investment is not affected by the tax credit, total investment will increase in line with private investment, to reach around twenty percent in the last three years of the Sexenio. As a consequence, real growth accelerates; it reaches four percent two years earlier because of the tax credit, in 1992 rather than in 1994. In the last two years of the Sexenio, the economy is projected to grow at a healthy 4.7 percent a year under this scenario.

Stronger investment performance under the same current account target of course requires higher private and/or public sector savings if the same current account performance is to be maintained. The econometric model runs suggest that under this high growth scenario, private consumption will grow faster, but less so than GDP. As a consequence, private savings goes up to provide between half and one percentage point of GDP extra leeway towards the end of the sexennio. The remaining difference will need to be made up by fiscal improvement. An initial improvement of between 1 and 1.5 percent of GDP in the non-interest surplus is necessary to accommodate the increased investment by the private sector. Reforms in tax administration and the structure of personal income and property taxation take on an added importance in this context. International personal income tax comparisons suggest that such an improvement in public sector revenue is not infeasible.

What about debt and the exchange rate under all these scenarios? Net external debt decreases under both scenarios as a percentage of GDP, but faster under the high growth scenario. Without the investment tax credit, net external debt falls from 67 percent of GDP in 1988 to 56 percent at the end of the Sexenio. Under the high growth scenario it actually goes down to 54 percent of GNP by 1994.

The model was run assuming a constant real exchange rate throughout both periods. This means that there is a potential imbalance between aggregate demand and supply for Mexican (non-oil.) goods; the ratio of total demand for (non-oil) Mexican goods by foreigners (export demand) and by domestic residents over aggregate supply of Mexican goods can thus be interpreted as an indicator of exchange rate misalignment. A decline below one suggests exchange rate overvaluation (Fig. 6B). The model run suggests that exchange rates may in fact be a problem early in the Sexenio. The ratio is projected to drop from 89% in 1988 to 86% in 1989. After that the situation improves as increasing investment increases demand for domestic goods. Under the no-tax-credit scenario, the ratio improves rapidly after 1989 and actually reaches one by 1993. This suggests that growth in 1989 could actually be restricted because of low aggregate demand for Mexican goods at the current relative price (i.e. real exchange rate). A real devaluation would help avoiding this by shifting domestic and foreign expenditure towards Mexican goods; an issue is, however, whether under the Pacto a real devaluation can in fact be achieved.

A final comment on employment. The real wage was assumed to rise at 4 percent per annum, which, according to the econometric analysis, just offsets the autonomous increase in demand for labor for given GDP. However, with an estimated labor demand elasticity with respect to GDP of only 0.64, employment