Incentive and Regulatory Framework
During the 1960s and 1970s, the incentive structure, as represented by tariffs, taxes, and the exchange rate, was biased in favor of a capital-intensive production structure that was highly import-dependent. In the mid-1980s, the incentive structure began to change, mainly as a result of exchange rate reform and trade liberalization. Government policies that reallocated and reduced expenditures induced a change in the structure of relative price products to the extent that the real exchange rate depreciated by about 40 percent between 1986 and 1990. This was an important trend as it implied that in the long run the structure of prices would favor the production of exports and efficient import substitutes as opposed to nontradables. The tariff reforms of 1986 and 1990 reduced the average level of nominal protection and compressed dispersion rates, thus reducing to some extent inherent production distortions. The priority now is to work towards eliminating non-tariff barriers.