ABSTRACT
This chapter demonstrates that the San Jose Protocol was not as momentous an event in the history of the integration movement as economists and integration theorists have contended. The balance of payments issue emerged on the regional level in April 1965 at a joint meeting of the Economic Council and the Ministers of Finance, called for by Secretariat of the General Treaty on Central American Integration. While direct taxation would have been a far more effective revenue measure, it was politically unacceptable to the national elites. The national political leaders responded favorably to the San Jose Protocol primarily because they wanted to avoid the real issue behind their growing fiscal losses— the explosive issue of fundamental tax reform. Nicaragua had created obstacles to free trade with its neighbors to protest the reluctance or inability of the member states to deposit the San Jose Protocol. Nicaragua also demanded preferential treatment, although it had the fastest growing economy in the region.
